HOW WILL HONG KONG’S NEW SECURITY LAW AFFECT FINANCIAL SECTORS?: TANISHA MISHRA

 

Introduction

On July 1, 1997 Hong Kong was handed over to China by the British rule. The only condition was to follow “One Country Two System” principle. A unique system which gives Hong Kong the autonomy to make and amend its laws, have a separate judiciary system, be a capitalist country and regulate freedom of speech and association. Hong Kong is ruled by a chief executive, to be advised by a body called executive council.

Following the series of events that the pandemic has led to, a very disturbing law was passed by the Chinese Government for the people of Hong Kong. The new National Security Law criminalises secession, subversion, terrorism and collusion with foreign forces, punishable by a maximum sentence of life imprisonment. Other features such as- damaging public goods can be considered as terrorism, the new security office can send cases to be tried in mainland China, Beijing will have to power to interpret the laws, the law controls journalists, social media and education, the authorities have new investigating powers and this law is applicable to everyone - anyone in China or Hong Kong even in for transit, regardless nationality or location can be held liable for violating this law.[1]

Why National Security Law?

In defence, the Chinese Government opined that the National Security Law intends to minimise the number of protests and to bring stability in Hong Kong. Yet, it can be also seen that China doesn’t care about Hong Kong’s autonomy anymore. Hong Kong used to contribute as much as 27% of the Chinese GDP during 1990s. However, now it has come down to less than 3%.[2] Earlier, China attracted foreign investments through Hong Kong, whereas China now has more cities like Hong Kong who come without any red tape.

Nonetheless, Hong Kong is a significant financial hub, companies prefer it for raising and borrowing money, it has become home to fintech, private banking and derivatives trading, Hong Kong money is easily convertible to US Dollars and Hong Kong is globally recognised for its strong investor protection and financial reporting transparency.[3]

Impact on the financial sector

The law has created a situation of chaos and ambiguity as how will it be implemented and how much the interference by the Chinese Government will is yet to be known. What is certain that it will have a huge impact on almost every sector, including the financial sector.

Despite Financial Secretary, Paul Chan’s assurance that financial sector can continue to operate under the existing legal framework, more than 1300 American Business operators in Hong Kong and more than 80% of the US companies, surveyed by the American Chamber of Commerce said that they are concerned about this law. And more than 50 out of 180 considered moving out capital to other location.[4]

Impact on financial sector due to the National Security law can be as follows:-

·       The first thing to consider would be the freedom of speech that could be enjoyed by the companies or their employees. If employees continue to get arrested for social media posts or tweets, it may become a problem for the company. It needs to be understood what could lead to such arrests. Secondly, clarity has to be obtained about the ambit of the word sedition. Would possible fraud amount to sedition?

·       Another important aspect is data security and privacy concerns. No banking, fintech or tech companies want to sell out their data to the Chinese Government. Furthermore nothing is known about the new investigating powers of the authorities. Will they during any investigation get access to private data of the company? Tech companies like Microsoft, Telegram, Facebook, Google and Twitter have blocked accessing user data in Hong Kong.[5]

·       The US-China trade war and the strained relationship between the two will lead to further complications for companies in Hong Kong. The US has already imposed restrictions for Hong Kong. It can hamper cross border deals as well.

·       Analysts foresee that with capital flight and culminating in a currency collapse can lead to huge losses to investors. This is known as a domino effect.[6]

·       Singapore can be the next financial hub in Asia.[7] Few hours away from New York, businesses and companies from Hong Kong might shift to Singapore for better laws and feasibility.

·       While implications on financial sector can be drastic, Chinese Tech companies might get a homecoming feeling. Hong Kong is a connector between China and the west. Chinese firms acknowledge Hong Kong as a middle ground where they can be regulated by the Chinese government and have easy convertible access to US dollar.[8]

 

Conclusion

Ease of doing business is something every company looks for. Availability of cheap raw materials, labour, market and business friendly regulations attract new businesses. The security law of Hong Kong might have an adverse effect on the financial sector, to the extent that Hong Kong may no longer be a financial hub. Even though Singapore is the choice of many, India can be benefitted by seizing this opportunity to welcome new businesses. Nonetheless, HSBC and Standard Chartered have articulated their support for the law, implying the future of financial sector in Hong Kong is not completely deserted.

 

 

 

 

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[1] Grace Tsoi, Lam Cho Wai, Hong Kong Security Law: What is it and Is it worrying?, BBC NEWS ( 17 Aug 2020, 4:30 PM), https://www.bbc.com/news/world-asia-china-52765838#:~:text=The%20new%20law's%20key%20provisions,to%20stand%20for%20public%20office.

[2] Mackenzie Sigalos, How China’s National Security Law could change Hong Kong forever, CNBC (18 Aug 2020, 6:40 PM), https://www.cnbc.com/2020/07/01/chinas-national-security-law-hong-kong-global-financial-center.html.

[3] The economics of National Security in Hong Kong, LOWY INSTITUTE (18 Aug 2020, 9:20 PM), https://www.lowyinstitute.org/the-interpreter/economics-national-security-hong-kong.

[4] Jill Disis, Eric Cheung, Will Ripley, Security Law could hurt Hong Kong as a global business hub, CNN BUSINESS (19 Aug 2020, 8:40 AM), https://edition.cnn.com/2020/07/01/business/hong-kong-business-security-law-intl-hnk/index.html.

[5] Fraser Howie, Hong Kong’s National Security law is bad for business, NIKKEI ASIAN REVIEW (20 Aug 2020, 6:20 PM), https://asia.nikkei.com/Opinion/Hong-Kong-s-national-security-law-is-bad-for-business.

[6] Supra note 2.

[7] Supra note 4.

[8] Ibid.