Are Hong Kong's days as a global business hub over?

A new joke is trending in Hong Kong. Locals scoff at Hong Kong's loss of status as a darling of global capital. As one person joked, this is the newest UNESCO World Heritage Site.

The draconian security law (Article 23) that came into force last weekend has only renewed underlying concerns.

While authorities say the bill will protect cities and ensure stability, critics say it will silence any opposition to closed trials and life sentences for crimes ranging from sedition to treason. I'm wary of that.

Mr. Zhang, a real estate surveyor who did not want to give his full name, said the move came at a time when the Chinese government's iron grip and U.S.-China tensions were already driving away foreign investors with a “anywhere but China” policy. , said Mr. Chan, a real estate surveyor.

“Investors could still invest here because Hong Kong was considered separate from China, but that's no longer the case,” he says.

The emphasis on national security and the dangers posed by “foreign forces” (a continuing theme in this law and in recent Chinese government policy) increases the risks for foreign capital and businesses operating in the city.

“The past two years have been abysmal, with no big transactions,” said Tse, who works for a Chinese state-owned bank. He said his company laid off 10% of its workforce in June and another 5% just last week. “You never know when your turn will come.”

It is too early to assess the risks of Article 23 to companies, but the article's “broad wording” and “serious consequences for non-compliance” could lead to increased compliance costs, says the German Chamber of Commerce. says Johannes Hack, Chairman of the Board. commerce.

The Hong Kong government told the BBC in a statement that Article 23 will move Hong Kong “from stability to prosperity” and will not affect “business as usual”. He also said it was “outrageous” to single out Hong Kong when other countries have security laws.

Hong Kong's Article 23, which extends the national security law imposed by China in 2020, comes at a time when the city government is trying to reassure the world that it remains a financial dynamo.

The Hong Kong General Chamber of Commerce and Industry claimed that it would make Hong Kong “a safer destination for domestic and foreign businesses and professionals operating in the city,” but Hong Kong's Chief Executive John Lee said the government He dismissed the idea that he was just interested as “ridiculous.” When it comes to national security, he calls such concerns a form of “soft resistance.”

Hong Kong's economy has been reeling from the Chinese government's crackdown on democracy protests in 2019 and its strict zero-coronavirus policy. Rents for commercial and retail space have fallen, leaving office buildings and stores vacant. Tourist numbers are down, with arrivals last year only 60% of pre-pandemic numbers.

The value of Hong Kong's crown jewel, the Hang Seng Index, has fallen by more than 40% since 2019. India overtook the Hang Seng Index in January to become the world's fourth largest stock market. Singapore has emerged as a strong financial rival in the region. Global banks are cutting jobs, especially in Hong Kong and China, citing slowing growth and plummeting investor confidence.

As the exodus of capital and people continues, the former head of Morgan Stanley Asia recently declared in a newspaper column that “Hong Kong is finished.” Investors should “value their lives and stay away from Hong Kong stocks,” veteran investor Lam wrote in an economic magazine.

“Outside perceptions of Hong Kong” have changed, Haq said.

“While the city remains distinctly different from the mainland, the focus on safety may increasingly blur the distinction in people's minds.”

Since the former British colony was returned to China in 1997, it has been operated on the principle of “one country, two systems.” The Chinese government has promised that Hong Kong will enjoy civil liberties for half a century.

But critics say the country has reneged on the deal, crushed the pro-democracy movement and imposed a national security law (NSL) in 2020, resulting in the arrest of more than 260 people, including former parliamentarians. Authorities defended this, saying it marked a transition “from chaos to governance.”

Local public order laws, outlined in the city's mini-constitution, were always under consideration. The first attempt in 2003 failed with half a million people protesting. This time, Article 23 was passed less than two weeks after it was tabled.

Under Xi Jinping, China has placed “absolute emphasis” on national security, and Hong Kong's status as a free society and international gateway has taken a back seat, said Kenneth Chan, a political scientist at Hong Kong Baptist University.

He said the arrest of former media mogul Jimmy Lai, who was charged under the NSL, was a “wake-up for the international community”.

“The national security law has no limits. Personal safety, private property rights, and personal assets are not guaranteed,” Dr. Chan added.

After police raided his newspaper Apple Daily in 2021, his company was suspended from trading and delisted the following year. The 76-year-old tycoon, who is currently on trial, has been jailed for three years and has assets worth HK$500 million ($64 million, £50 million) frozen.

Hong Kong's common law system, which underpins the rule of law, has come under intense scrutiny following the trials of pro-democracy protesters. But while critics are concerned that Mr. Lee can now choose the judges who handle national security cases, he is seen as independent, at least on commercial matters.

Under such security laws, businesses in Hong Kong, like those on the mainland, will need to take additional steps to mitigate political risks, Dr Chan said.

“Because no one knows where politics are headed, large companies are starting to hire political consultants to assess risk and build political connections. All of these are new costs and lead to reduced efficiency. linked.”

Kevin Tsui, chief economist at research firm Orientis, said the city should not be discounted as an international financial hub. He added that Hong Kong should take advantage of its advantages: a simple, low-tax tax system and the fact that it is the only Chinese city without exchange controls. The Hong Kong dollar is also pegged to the US dollar, providing financial stability.

“Foreigners want to do business with China, even if Hong Kong is just a Chinese city,” he says.

But confidence in the city has been shaken, especially as it has been affected by the slowdown in China's economy, which has been hit by a debt and real estate crisis.

The mainland is the city's largest trading partner and second largest source of investment. Of the 2,600 companies listed on Hong Kong's stock market, half are from mainland China.

However, new rules introduced by the Chinese government last year require formal approval for Chinese companies to list overseas. This has made the process much more complicated, said one bank official, speaking on condition of anonymity.

“All we can do is wait because we don't know the progress at all. If companies are involved in sensitive industries such as data security or genetic technology, the process will be very slow.”

Hong Kong, which has been ranked the world's number one IPO destination seven times in the past 15 years, is now ranked eighth, according to an industry report.

“Beijing wants private companies to raise money internationally to save the economy, but it is also concerned that these companies will no longer be in business.” [their] Post-listing management is difficult,” said a banker who requested anonymity.

“They want to control everything, but that ends up destroying financial markets.”

Additional reporting by Grace Tsoi in Hong Kong