Political Aggression: Beijing throttles Hong Kong’s status as financial hub

On June 30, Beijing imposed a harsh new security law to ostensibly prevent sedition, collusion with foreign powers and terrorism in the territory. But its 66 articles carry far deeper implications for Hong Kong.

Western governments and rights groups say the law represents a de facto dismantling of the “one country, two systems” formula, which is supposed to keep Hong Kong largely autonomous until at least 2047 and has underpinned the city’s role as one of the world’s major financial centers. In response to Beijing’s move, US President Donald Trump ordered an end to Hong Kong’s special trading status under US law.

Some businesses are also reassessing their presence in the territory. “There are already indications that some are voluntarily withdrawing from Hong Kong,” Heribert Dieter, an expert at the Berlin-based German Institute for International and Security Affairs (SWP), said. He pointed to the imminent relocation of the office of the Asian head of Deutsche Bank from Hong Kong to Singapore as an indication of how businesses could adapt to the new situation.

Fears abound about the new powers under the law of surveillance, the freezing of assets and demands for information. The decline of free speech may also hit the efficiency of the city’s financial market. “Bank employees and financial analysts who evaluate the Chinese economy run the risk of being accused of subversive activities and, in the worst case, of being sent to prison,” Dieter said. “At the moment, it is not clear how exactly the government will enforce this, but the law allows for it.”

Political tensions and protests, in addition to the damage wrought by the coronavirus pandemic, have taken a toll on the city’s economy, with GDP in the second quarter contracting by as much as 9% from a year. It was the fourth consecutive quarter of contraction for the economy. The health emergency weighed heavily on consumer spending, trade and tourism in the financial hub.

Hong Kong is one of the world’s most important financial centres, second only to New York and London in terms of global significance. The territory boasts over 150 licensed banks and more than 1,600 asset managers as well as associated professional services. Although Hong Kong accounts for less than 3% of entire China’s gross domestic product (GDP), the territory is the nation’s most important offshore fundraising location.

Despite the growing significance of places like Shanghai and Shenzhen as China’s financial centers, Hong Kong remains a key gateway connecting mainland China with global financial markets. It is a leading offshore centre for both US dollar and renminbi funding. Chinese businesses, including tech giants and state-owned firms, have often turned to the city’s capital markets to raise funds through IPOs, loans or bonds.

“Hong Kong is the only financial center in the People’s Republic of China that has no restrictions on the movement of capital,” Dieter said. Besides any lack of capital controls, Hong Kong owes its status as a flourishing financial hub to a number of other factors, like the region’s rule of law, independent judiciary, relatively low taxes as well as huge concentration of financial and legal service providers.

Hong Kong is also attractive as a financial center because the currency there, the Hong Kong dollar, is more or less firmly pegged to the US dollar, Dieter said, noting that this means that “there is almost no exchange rate risk” for companies and financial market players. “A changeover to yuan [China’s currency] would make everything more difficult and more expensive.”