What just happened?
China has announced to the World that it would impose a national security law on Hong Kong.[1] From the outset, this legislation is a threat to Hong Kong's liberties. At LawMiracle, we believe that such forceful implementation will affect the territory's attractiveness as a business and economic powerhouse.
What does this mean?
The law to make any act of "treason, secession, sedition and subversion" criminal may likely pass through the lawmakers of Hong Kong without any contest.[2] These are the same terms that enable the Chinese government to lock up 'dissidents,' including Uighurs and Tibetans.[3] China's reason behind such an announcement derives from last year's mass protest in the region. This could well be the "death knell" of the one country, two system arrangement that was made between Britain and China in 1997,[4] considering the legislation enables Beijing to establish intelligence agencies in Hong Kong, including the ministry of state security which is China's primary intelligence agency.[5] As the Economist rightly notes, 'The message is clear. Rule by fear is about to begin'[6], and the high degree of autonomy that Hong Kong once enjoyed is now coming to a bitter end.
In the past, the special administrative region had independent courts. It allowed free information flow, making it an ideal base for everyone from the US investment bankers to advise Chinese state companies to international parties carrying out a successful commercial transaction deal.[7] It follows the law's announcement, and further escalation has caused a significant negative impact on the financial market, as illustrated in Hong Kong's Hang Seng Index (HSI), which dropped by more than 5% on Friday.[8] Further damage is expected as widespread protest continues with its aim of upstaging the long-term erosion of the regions legal system[9] and this could affect lucrative avenues such as a decrease in foreign direct investment that offer greater annual growth rate of Hong Kong's GDP and exchange stability in the market. China's anti-sedition law's financial implications will take a heavy toll on law firms operating in the region.
How does this affect the legal industry?
Law firms dealing with ongoing transactions in the region will be peeping over their clients' shoulders, who may face significant losses due to strategic changes the law will have incorporating mainland Chinese values in the territory. For instance, a former Hong Kong chief executive has warned that HSBC's dominant and lucrative business position in the disputed region should not be taken for granted. HSBC makes as much as 90% of its profits in Asia and the vast majority of that in Hong Kong. As the Financial Times rightly notes, the Bank is in the middle of the deepest restructuring in its history as it moves away from the US and European market and becomes more dependent on Asia for growth.[10] If global firms such as the HSBC do not adhere to the contentious new national security law, they may have to pay heavy sanctions or face exits in the market. A similar form of punishment was handed to the Hong Kong airline, 'Cathay Pacific,' who were forced to sack its chief executive and another senior officer because they did not 'act swiftly enough to discipline a pilot accused of participating in a violent protest.'[11]
Hong Kong is one of the biggest markets for equity and debt financing, and although it's GDP is equivalent to only 3% of mainland China, down from more than 18.4% in 1997, the region is stilled deemed attractive due to its world-class financial and legal systems.[12] With one of the busiest shipping hubs in the World, the small territory holds recognition for being the World's eighth largest trading entity.[13] All of these credentials are now going to change. China expert, Willy Lam, is concerned that the law could see people punished for criticising Beijing whilst all trials involving national security will be conducted behind closed doors, further promoting ambiguousness to what national securities mean as it could cover almost anything.[14] The longer-term effect of the law could change Hong Kong's legal culture as Mainland Chinese law prompts all actors, including government subsidiaries, to the law, causing fractions in democracy.[15] Definitions and details are necessary to reduce the fear factors developing in the business community. Still, the vague settings bestowed in this law may indicate that even foreign interference in the form of private firms can potentially be viewed as a breach of national security.[16] Hong Kong serves as setting of strategic importance under Chinese sovereignty. Mainland Chinese companies use Hong Kong to raise foreign capital to finance projects in China.[17] This would surely increase in the future. More involvement of China will lead many state supporters of the one country, two systems like the USA, to consider whether to extend Hong Kong's preferential trading and investment privileges.[18] Global firms will relocate to other Asian headquarters like Singapore, and law firms will follow, whilst the beauty of the east slowly fades away.
Written by Amarjit Tark
Assessing Firms:
The topic concerns all international commercial law firms.
References:
[1] Grace Tsoi, ‘Hong Kong security law: What is it and is it worrying’ (BBC News, 29th May 2020)
[2] ‘NPC: China moves to impose controversial Hong Kong security law’ (BBC News, 22nd May 2020). Read more on the security law at Grace Tsoi, ‘Hong Kong security law: What is it and is it worrying’ (BBC News, 29th May 2020)
[3] ‘Dragon Strike: China has launched rule by fear in Hong Kong’ (The Economist, 28th May 2020)
[4] Tom Mitchell, Nicolle Liu, Stephen Morris and Laura Hughes, ‘HSBC told not to take ‘unique Hong Kong privileges’ for granted’ (The Financial Times, 29th May 2020)
[5] Lily Kuo, ‘China threatens, ‘countermeasures’ against UK over Hong Kong crisis’ (The Guardian, 29th May 2020)
[6] ‘Dragon Strike: China has launched rule by fear in Hong Kong’ (The Economist, 28th May 2020)
[7] Tom Mitchell, Nicole Liu and Xinning Liu, ‘A broken piece of jade’: the turbulent future of Hong Kong’ (The Financial Times, 29th May 2020)
[8] ‘NPC: China moves to impose controversial Hong Kong security law’ (BBC News, 22nd May 2020).
[9] Tom Mitchell, Nicole Liu and Xinning Liu, ‘A broken piece of jade’: the turbulent future of Hong Kong’ (The Financial Times, 29th May 2020)
[10] Tom Mitchell, Nicolle Liu, Stephen Morris and Laura Hughes, ‘HSBC told not to take ‘unique Hong Kong privileges’ for granted’ (The Financial Times, 29th May 2020)
[11] Tom Mitchell, Nicolle Liu, Stephen Morris and Laura Hughes, ‘HSBC told not to take ‘unique Hong Kong privileges’ for granted’ (The Financial Times, 29th May 2020)
[12] Noah Sin, ‘Explainer: How important is Hong Kong to the rest of China’ (Reuters, 5th September 2019) and ‘Dragon Strike: China has launched rule by fear in Hong Kong’ (The Economist, 28th May 2020)
[13] Tai Ming Cheung, ‘Hong Kong’s strategic importance under Chinese sovereignty’ (In China’s Shadow, 1998)
[14] Grace Tsoi, ‘Hong Kong security law: What is it and is it worrying’ (BBC News, 29th May 2020)
[15] Tom Mitchell, Nicole Liu and Xinning Liu, ‘A broken piece of jade’: the turbulent future of Hong Kong’ (The Financial Times, 29th May 2020)
[16] Tom Mitchell, Nicole Liu and Xinning Liu, ‘A broken piece of jade’: the turbulent future of Hong Kong’ (The Financial Times, 29th May 2020)
[17] Tai Ming Cheung, ‘Hong Kong’s strategic importance under Chinese sovereignty’ (In China’s Shadow, 1998)
[18] ‘NPC: China moves to impose controversial Hong Kong security law’ (BBC News, 22nd May 2020).