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Hong Kong security law is going to devastate its economy: 2019 home prices fell 29% and dropping

Updated: Jun 6, 2020

Hong Kong security law is going to devastate its economy

Companies will reject Beijing control and US can withdraw trade privileges

asia.nikkei 25 May 2020 William Pesek

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

China's announcement last week that it plans to impose national security legislation on Hong Kong raised grave concerns about the city's democracy. But the economic toll could be sizable, too.

At the very least, Hong Kong can kiss goodbye its status as the world's second-freest economy, a halo bestowed by the Heritage Foundation. The Washington-based think tank has long fetishized Hong Kong's negligible tax rates, duty-free ports, ease of doing business, unfettered capital flows and transparent rule of law.

Worse, last year the U.S. passed the Hong Kong Human Rights and Democracy Act, which mandates an annual review of the city's autonomy; if it finds that China has taken more control, as this move certainly suggests, the U.S. can remove economic and trade privileges Hong Kong enjoys. This would remove its attraction as a gateway to China.

All of this comes as Hong Kong's economy reels from last year's massive protests -- which may now return -- the U.S.-China trade war and the fallout from the coronavirus outbreak.

Hong Kong's gross domestic product fell 5.3% in the first quarter of this year; President Xi Jinping's new move is only going to ensure more economic trouble.

Since 2012, the most powerful Chinese leader in generations has steadily chipped away at many of the reasons multinational companies are headquartered in Hong Kong. His government has cowed Hong Kong-based media into self-censorship; worked to muddy business ownership reporting to make it harder to find out who owns companies; and imposed "patriotic" education on students.

During last year's protests, Beijing strong-armed companies like Cathay Pacific to punish employees supporting Hong Kong's pro-democracy movement and ousted Cathay's chairman and CEO.

Xi is "completely destroying Hong Kong," Dennis Kwok, a pro-democracy politician, told fellow lawmakers. Xi's latest manoeuvre, he says, "is the end of 'one country, two systems,'" the concept that enabled Hong Kong to run a world-leading financial system without meddling from Beijing.

There are plenty of direct ways the new national security law could backfire on economic freedom in Hong Kong.

For example, it criminalizes "foreign interference" without specifying who the measure targets or where the boundaries lie. Might a Goldman Sachs report out of Hong Kong questioning China's gross domestic product data put its business charter at risk? What about Nomura Holdings downgrading a key China Inc. company?

International news organizations might feel paranoid about reporting on fraud at Hong Kong-listed companies or China corralling more than 1 million ethnic minority residents in Xinjiang province into "indoctrination camps." It is hard to see how short sellers like Muddy Waters Research maintain Hong Kong offices when they spotlight alleged fraud at mainland companies, most recently Nasdaq-listed Luckin Coffee.

The extradition bill that helped fuel the 2019 protests, which allowed people to be moved from Hong Kong to the mainland, could return, perhaps imposed by fiat from Beijing. What multinational corporate board or startup team eyeing an IPO wants to have that worry in the backs of their minds? Or the spectre of the Chinese Communist Party remaking Hong Kong's judiciary and banking system in its image?

The more Xi damages China's liberal financial zone, the more the foreign companies generating millions of jobs in Hong Kong will question why they should stay.

This is all before we consider that last year's protests might imminently return, COVID-19 social-distancing be damned. "The reaction in Hong Kong could be intense, and violent," says Bill Bishop, author of the widely read Sinocism newsletter, wrote to readers on May 21.

The protests lasted six months and drove Hong Kong into its first recession in a decade. They devastated retail sales in a city that derives 65% of GDP from private consumption. And they ravaged tourism sharply and slammed property markets: average home prices fell 29% in 2019 and have continued to drop since. The declines are likely to continue as Xi methodically morphs Hong Kong into just another mainland city.

If Chief Executive Carrie Lam and Financial Secretary Paul Chan still have jobs in a month, their roles may be little more than delivering bad news from Beijing -- not just on GDP, but how the Hong Kong that libertarians loved is dying a little more each day.

Hong Kong warned of more pain as China-US spar

RTHK 28 May 2020

Business analysts and political leaders reacted with warnings of more pain for Hong Kong after the US said it now feels the city is not autonomous enough from China to warrant a special status in trade ties.

Leader of the pro-business Liberal Party, Felix Chung said the announcement on this by the US Secretary of State, Mike Pompeo, overnight would affect "the confidence of the business sector in Hong Kong, the future investments and everything will be on hold".

Chung said the SAR's business sector is concerned that the US may strip Hong Kong of its special status as Beijing imposes its new security law for the city.

He said Hong Kong is a victim getting caught in the conflict between China and the United States.

Benjamin Quinlan, CEO and managing partner at Quinlan and Associates also echoed the view, saying the city is now caught in the middle of the China-US standoff.

"We expect the latest move to have considerable implications for the city, with the threat of higher tariffs, sanctions, as well as tougher investment and visa rules between Hong Kong and the US, including potential sanctions on businesses (particularly banks) operating in the city found to be supporting anyone in violation of the 'One Country, Two Systems' model," he said.

"Expect to see businesses and investors become even more skittish over the future [of] the city as an international financial hub,” the finance expert said.

Hong Kong-based Iris Pang, the chief economist, Greater China at ING, said she is more worried about reaction out of Beijing.

"China will retaliate on this. It's more the Chinese retaliation that I'm waiting for and worried about, because I don't know how they will retaliate,” she said.

But one expert said it was Beijing that stands to lose a lot if it gets into a full-blown sanctions war.

“If Washington opts for hardline measures it would risk all of the financial connectivity that China has to the free market", according to Robert Spalding, a US-China expert at the Hudson Institute.

"Once that goes away, stocks, bonds, financial transactions, Swift, all of that is imperilled," he told Bloomberg News. 

But Julian Ku, an expert on international law at Hofstra University, said Trump was likely to take a softer stance to give Beijing room to manoeuvre.

"I expect him to take some major steps that would show China he is serious, but not to change every US law that applies to Hong Kong," he said. "I expect he would hold back on some matters so that he can offer China a chance to back down."

Former security secretary Regina Ip, meanwhile, played down reports that the US will sanction Hong Kong officials or lawmakers.

She said it was the National People's Congress in Beijing that spearheaded the legislation and not the Hong Kong government and lawmakers here.

Former student activist Joshua Wong and his party Demosisto – which has been calling for Washington to act over Beijing's handling of protests in Hong Kong – said US steps are a “tragic but necessary step”.

Wong blamed Beijing for selling out Hong Kong and said he expects some sanctions to come into effect in a fortnight or so. (Additional reporting by Reuters, AFP)

Further Reading:

China Short: wake up and smell the fraud! (Luckin Coffee)

As Hong Kong rents sink, new overseas brands eye expansion on the cheap (SCMP)

Pro-China supporters hold up Chinese national flags facing Victoria Harbour in September 2019: the more Xi damages China's liberal financial zone, the more the foreign companies will question why they should stay. © Reuters

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