By John Lyons and Frances Yoon
HONG KONG -- As China drew up a new security law for Hong Kong
last month, its top Foreign Ministry official in the city gathered
international business groups and diplomats to deliver a message
from Beijing: Don't panic.
The law would target only a small group of radicals and wouldn't
impede the free market ethos behind Hong Kong's rise as a global
business hub, the official said. But now that businesspeople are
finally seeing the law, there is much to cause concern.
While no one expects the giant money flows coursing through Hong
Kong to cease anytime soon, the law sets in motion fundamental
changes that threaten to erode the city's special role as a gateway
connecting Western finance and know-how with China Inc.
"Businesses were kind of waiting and laying their bets to see
how bad it would be, and then it turns out it is really bad," said
Christopher Hughes, a London School of Economics professor of
international relations who focuses on Chinese foreign policy. "I
wouldn't be surprised if changes happen faster than you think."
The law targets four political crimes: secession, subversion,
terrorism and foreign interference. But lawyers said its wording is
so broad that it is easy to imagine how a business dispute with a
Chinese company could end up construed as a breach of the law,
putting executives at risk of prosecution.
The new law also threatens the unfettered communication and
information flows that underpin global markets. It directs Hong
Kong to toughen its regulation of the internet and gives
authorities the power to intercept electronic communications and
conduct warrantless searches. Mainland agencies will oversee
foreign media in the city. Meantime, crimes such as revealing state
secrets in theory could be interpreted to include market research
or financial analysis on state firms.
Perhaps most significantly, the court system that Hong Kong
inherited from the British and has operated separately from the
mainland will be superseded by Chinese courts.x Security
authorities may intervene in Hong Kong cases under a range of
scenarios and move them to a mainland system where proceedings may
be secret. The penalty for many crimes under the law is life in
prison.
Those are significant deterrents for some professionals, and
many executives worry privately that growing Chinese encroachment
on the city's freedoms will hurt their ability to recruit and
retain talent.
"I criticize the Chinese government online all the time, and the
idea that I will be subject to less freedom worries me," said
Christine Yang, a Hong Kong lawyer at a company that makes personal
protection equipment. Among the broadly worded crimes in the new
law is provoking hatred against China's central government.
Ms. Yang said she has found a new job outside Hong Kong and is
preparing to move with her two children in July. She worries about
the provisions in the new law that let Beijing override Hong Kong's
justice system.
"They're basically going to be running their own game, and that
is concerning," she said.
Beijing pushed through the national security law Tuesday in a
bid to crush a year of pro-democracy, anti-China unrest in Hong
Kong. The former British colony has largely governed itself since
it was returned to China in 1997 under an arrangement called "one
country, two systems," but its laws leave some room for the
mainland to impose legislation on the city.
Hong Kong's stock market fell nearly 6% when Beijing revealed
its plans for the national security law in late May. But it has
risen in recent days, more than making up the losses on optimism
the law will end the turmoil that has hurt the city's property
prices and economic growth. The rising stock prices also reflect
the fact that much of the money flowing though Hong Kong's markets
comes from business with mainland Chinese investors and firms.
Bankers say Chinese companies will continue to use Hong Kong to
raise capital, as JD.com Inc. and NetEase Inc. did this year, and
that their mainland clients support the new law. For people who
understand China, "there's no change," one venture capitalist
said.
Market activity isn't likely to be hurt in the short term, said
Weiheng Chen, a partner at Wilson Sonsini who works on
capital-market transactions and mergers. But there could be an
impact on longer-term commitments of foreign capital until the
international business community sees how the law will be enforced,
he said.
China has vowed its crackdown will target protesters and not
law-abiding businesses. But it may become difficult to separate the
two in practice. Many of the hundreds of thousands of protesters
that took to the streets are also employees at major firms. Their
arrests will raise tricky moral and legal issues for corporate
lawyers.
It is far from clear the new law will quell the unrest. Millions
of Hong Kongers oppose mainland interference and see the law as an
unjust campaign to destroy the individual freedoms they have long
enjoyed. Thousands took to the streets Wednesday, the first day the
law was in force. Police responded by firing pepper rounds and
water cannons at the crowds and arresting around 370 protesters,
including 10 for violations of the new law.
China's decision to enact the law has provoked an international
backlash that may also damage the business climate. The U.S.,
saying Hong Kong is no longer autonomous enough to be treated
separately from China, has banned exports of dual-use technology to
the city and has threatened to take other measures such as
sanctions.
At the American Chamber of Commerce in Hong Kong, some 60% of
respondents in an early-June poll said they believed the law would
harm their business. Some 30% of companies said they were already
considering relocating some operations or assets.
"It will take time for the business community to digest details
of the law, but we hope it will not impact the dynamism and
benefits of this great city," the American Chamber said
Thursday.
Hong Kong is an enormously lucrative place to do business, and
the prospect of profiting from China's huge market gives companies
a strong incentive to adapt to the new environment rather than
retreat. Despite the unrest and a pandemic, nearly $135 billion in
funds was raised on Hong Kong's stock exchange in the first five
months of the year, up 27% from a year earlier.
The city was founded in the 19th century as a trading hub for
narcotics, silk and tea during Britain's Opium Wars. It has
overcome challenges in the past and always emerged intact as a
profitable global business center. Many people predicted its demise
before the 1997 handover; but with a stable currency and
British-style legal system, it became a preferred place for Western
investors to access the enormous flows of capital and trade
generated by a growing China -- all while living as they always had
in the city.
Some in Hong Kong said the passage of the security law feels
like the real handover. Over time, observers said, the business
environment may come to resemble something closer to that
prevailing in mainland China, as the city's legal system,
government and economy become more integrated.
"Whatever precautions businesses take in mainland China -- for
example, ensuring that laptops and mobile devices do not contain
sensitive, unencrypted data of interest to Chinese authorities --
should now be extended to Hong Kong," a report on the new law from
the business consulting firm Teneo warned.
Most international firms in Hong Kong already do business in the
mainland and have accepted the risks that come with operating under
an authoritarian system -- such as possible snooping by security
agencies -- and are schooled in understanding where government
sensitivities lie.
"They understand doing business is different from stepping into
the politics arena," said Iris Pang, chief economist for Greater
China at ING Bank NV in Hong Kong.
Corporations that rely on China for significant parts of their
revenue face pressure not only to adapt to the new environment, but
to praise it. In June, London-based banking giant HSBC Holdings
PLC, which makes most of its profit in Hong Kong and mainland
China, posted a photo of its Asia chief signing a petition in favor
of the national security law.
The show of support for the law came after a former leader of
Hong Kong criticized the bank for remaining silent on the bill.
"HSBC's businesses in China can be replaced overnight by banks from
China and from other countries," warned former Chief Executive
Leung Chun-ying.
Businesses, from luxury brands to airlines, have decided to bend
to China's demands on issues such as freedom of speech rather than
lose access to the market. Last year, the chief executive of Hong
Kong's flagship airline, Cathay Pacific, stepped down after it came
under pressure from Beijing over employee support for the
pro-democracy protests.
Before the security law was even drafted, the executive director
of Hong Kong real-estate giant CK Asset Holdings Ltd., Justin Chiu,
told reporters that the measure will leave people "more at ease
about the future and stability of Hong Kong."
While many big companies publicly voice support for the law,
some foreign executives at multinational firms privately
acknowledge they are hedging their bets. Some have taken their
children out of Hong Kong schools and placed them in boarding
schools elsewhere so their education won't be disrupted if they
decide to leave at some point next year. Others are moving assets
and staff to other cities in the region.
Youssef El Kaddioui, who runs an online sales company in Hong
Kong, is moving some operations to Singapore out of concern that
the unrest may continue and foreigners could be targeted in
enforcement of the law, he said.
"It's extremely risky to keep all of our operations in Hong Kong
at the moment," said Mr. El Kaddioui, who is from Morocco. "And in
the long term, the possible impact could be that less companies
come here, and more leave. This makes me question whether it makes
sense to stay in Hong Kong."
--Stella Yifan Xie and Chong Koh Ping contributed to this
article.
Write to John Lyons at john.lyons@wsj.com and Frances Yoon at
frances.yoon@wsj.com
(END) Dow Jones Newswires
July 02, 2020 14:59 ET (18:59 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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