Hong Kong — National security law threatens business attractiveness

The central government of the People's Republic of China intends to bypass Hong Kong’s legislature and impose a national security law that a) criminalises sedition, terrorism and foreign interference and b) establishes mainland state security agencies in the city. This could undermine the high level of autonomy promised under the “one country, two systems” political model that was intended to govern the territory until 2047. Hong Kong’s status as a global hub for finance and commerce depends on its strong rule of law, sanctity of contracts, economic freedoms, inclusive institutions, and seamless access to Western financial markets.

The favourable resolution of three interconnected questions are key to Hong Kong’s continued economic dynamism and its status as Australia’s 11th largest export market. First, as COVID-19 restrictions ease, will the proposed legislation reignite large scale protests that prevent the economy from recovering from recession? Second, how will Hong Kong’s businesses respond? Chinese mainland firms are increasingly important to Hong Kong’s economy; in 2018 the number of mainland businesses with offices in the city eclipsed the number of US firms for the first time (Chart). However, the legislation may see Western firms shift business operations from the city. Third, will Hong Kong continue to qualify for Washington’s favourable trading terms? Bipartisan US legislation links Hong Kong’s special trade status to continued autonomy from Beijing. But US Secretary of State Mike Pompeo notified Congress in late May that Hong Kong is no longer regarded as demonstrably freer than the rest of China. This could see Washington impose tariffs, trade restrictions and visa requirements on Hong Kong consistent with China. Restrictions on the use of US dollars by some Hong Kong officials, firms or banks is also possible, entailing possible widespread financial implications.