The US claim that Hong Kong is no longer autonomous from China is the most striking western political response to Beijing’s plan to impose a security law on the territory.
The statement also implies that the Chinese government’s control over the day-to-day running of the former British colony, which entered a 50-year period of semi-autonomy in 1997, is accelerating.
But what are the practical implications for business and finance, as well as for Hong Kong’s longstanding role in international trade?
The US bestows a special trade status on Hong Kong, based on a 1992 Act that allows it to treat the territory differently to mainland China, even after the handover from British control in 1997. Last year, amid escalating protests in the territory, Congress passed a bill requiring the state department to reassess annually whether Hong Kong should retain that status.
Mark Williams, chief Asia economist at Capital Economics pointed out last year that even if President Donald Trump revoked the 1992 act, Hong Kong would still be treated as an independent customs territory by the World Trade Organization and by other international bodies such as the IMF.
The WTO is not necessarily a barrier to tariff action, as the US-China trade war makes clear. That dispute has already weighed on Hong Kong over recent years as a large amount of trade that flows from the territory to the US is from mainland China. In 2018, about 8 per cent of China’s exports to the US came through Hong Kong.
Any restrictive new measures on Hong Kong exports specifically, therefore, would probably be a symbolic blow to a city that no longer manufactures many goods, but remains almost existentially linked to the concept of free trade.
Wendy Cutler, vice-president at the Asia Society Policy Institute in New York, and a former trade representative in the region, said that measures “would not have a big commercial impact” because direct trade between Hong Kong and the US was low, but could “have a chilling effect on business activity, particularly if followed by other actions”.
Mr Williams also argued that one big risk was related to problems in the other direction: restrictions on the import of sensitive technologies from the US. He said that “would remove one of Hong Kong’s distinct advantages as a business location relative to mainland China”.
Financial markets and the dollar
Access to global financial markets built around the US dollar, to which Hong Kong’s currency is pegged, is one of the defining distinctions between the city and the Chinese mainland. This has allowed Hong Kong to act as a gangplank between China and global capital markets, generating business for banks, law firms and other financial service providers.
Market participants suggested there were few signs of any seismic change to that arrangement. Michael Spencer, chief economist for Asia Pacific at Deutsche Bank, said in a note that “we can see no justification” for restrictions on the dollar in Hong Kong, or sanctions on the region’s banks.
“There may be added scrutiny on payments to Hong Kong, but fundamentally we do not see a reason today to expect any restrictions on capital flows between the US and Hong Kong,” he noted.
Instead, questions that are arising relate to more nuanced corners of the financial system plumbing. Mr Spencer raised the question of index providers, important designators of investment globally, adding that Hong Kong was included in the MSCI World, with developed economies, with Chinese mainland stocks included in emerging markets indices.
US rating agencies also rate Hong Kong differently to the mainland. S&P rates the territory at AA+, compared with A+ for China.
The business community
As of June 2018, Hong Kong was home to 290 regional headquarters for companies with parent organisations in the US, according to government figures. One of the more plausible consequences of the US statement is a worsening of sentiment towards the territory.
In a survey of its members published in October, the American Chamber of Commerce found that more than half of companies it spoke to had considered moving from Hong Kong, had made contingency plans or had trouble hiring from overseas.
For the city’s wider expat community, often employed in industries that rely on Hong Kong’s special status, the controversy over the national security law is the latest in a long line of difficulties.
These include a wave of protests and rising Chinese tensions with countries that have called for an inquiry into the origin of the coronavirus, such as Australia.
“The changes that have happened here have certainly changed how people feel about Hong Kong,” said one Australian expat who has lived in the city for almost two decades and asked to remain anonymous.
“Nobody’s desperate to get out, but people are . . . thinking more about their future.”