US will no longer consider Hong Kong autonomous from China

US secretary of state Mike Pompeo has said Hong Kong is no longer autonomous from China, taking a potential first step towards removing the special trade status that has helped sustain Hong Kong as Asia’s financial capital.

The move marks a significant shift in US policy in the wake of Beijing’s decision to impose national security legislation on the territory, which could be rubber-stamped by China’s legislature on Thursday, and raises fears that Hong Kong’s status as a global financial hub will be endangered.

“No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground,” Mr Pompeo said on Wednesday.

“I certified to Congress today that Hong Kong does not continue to warrant treatment under United States laws in the same manner as US laws were applied to Hong Kong before July 1997,” he added, referring to the date the British handed the territory back to Chinese authorities following 150 years of British control.

The designation will lay the groundwork for further action against China over the proposed law — although it is unclear how far the US might go.

The change in designation opens the door to the US ending or revising the special trade and economic agreements that enable Hong Kong to operate as a free-market haven as part of China despite its otherwise prescriptive economy.

It could also hit the territory’s visa regime, which allows westerners to travel to Hong Kong with far fewer hurdles than to the mainland.

Donald Trump has promised to act “powerfully” in response to the new law this week, and White House national security adviser Robert O’Brien told NBC’s Meet the Press on Sunday that the US would consider sanctions if China moved ahead with the security law that could impede Hong Kong’s autonomy.

Under legislation enacted last year, the US state department is required to certify to Congress that Hong Kong is sufficiently autonomous from China to warrant special treatment.

Mr Pompeo’s decision on Wednesday will kick off a process by which the administration can determine what types of special treatment Hong Kong will be permitted, according to Evan Medeiros, a former China director on the US National Security Council and top Asia adviser to former US president Barack Obama.

If the US were to revoke Hong Kong’s special trade status, it could subject bilateral trade between the two to the same tariffs, sanctions and export restrictions the US applies to China, and imperil the city’s standing as a global financial centre. 

“There’s no question this is a big move, but it’s not an all or nothing thing,” Mr Medeiros said. “The US has to decide what sort of special treatment it would withdraw,” he added, citing a range of measures such as pulling out of an extradition treaty or addressing export controls, to more extensive tariff actions that could ultimately fell Hong Kong’s status as a global financial hub.

$33.4bn US trade surplus with Hong Kong in 2018 – USTR

China agreed to govern Hong Kong under a policy widely known as “one country, two systems”, under which the territory was due to retain significant autonomy for 50 years following handover.

Mr Medeiros said the Trump administration faced a balancing act because any extensive withdrawal of privileges could undermine commercial rule of law and faith in independent financial regulators, which could hurt Hong Kong business and accelerate its absorption into the Chinese mainland, defying US aims.

Bonnie Glaser, a China expert at the Center for Strategic and International Studies bipartisan think-tank, said the pre-emptive move by the Trump administration was intended to be tough on China but in fact risked harming Hong Kong far more than it would Beijing.

“My fear is that taking this step — which is almost the nuclear option — could ensure that Hong Kong within a period of time sees a flight of capital and expats and Hong Kongers who have the means to leave,” she said, adding that the Trump administration’s moves could push China to put in place a harsher version of the law.

Extensive capital flight would also risk pressure on Hong Kong’s managed peg to the US dollar, which has operated within a narrow trading band for nearly four decades. 

Mr Pompeo said it gave him “no pleasure” to make the declaration, saying the financial hub had flourished as a bastion of liberty for decades. Analysts have warned the impact of Beijing’s decision and a strong US reaction could lead to violence in Hong Kong.

White House press secretary Kayleigh McEnany said on Tuesday that Mr Trump thought it was “hard to see how Hong Kong can remain a financial hub if China takes over”.

The Hong Kong government said in an earlier statement on Wednesday: “Any unilateral change of US policy towards Hong Kong would create a negative impact on relations between the two sides as well as harm the US’s own interests,” in response to the criticism from the US Chamber of Commerce on the proposed national security law.

The US had a $33.4bn trade surplus with Hong Kong in 2018, according to the US trade representative. About 8 per cent of mainland China’s exports to the US, and 6 per cent of its imports, were routed through Hong Kong in 2018. Technology transfers, foreign investment and academic exchanges from the territory are also subject to less scrutiny by the US.

Mr Pompeo said the US stood with the people of Hong Kong against Beijing’s “disastrous decision as they struggle against the Chinese Communist party’s increasing denial of the autonomy they were promised”.

“While the United States once hoped that free and prosperous Hong Kong would provide a model for authoritarian China, it is now clear that China is modelling Hong Kong after itself,” he added.

Additional reporting by Nicolle Liu

Follow @KatrinaManson on Twitter

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