Hong Kong Economy, One of the Few to Survive Pandemic, Collapses over Chinese Takeover

hong kong ferry
Sébastien Goldberg via Unsplash

The Hong Kong stock market was rocked by a massive sell-off on Friday after the Chinese Communist government in Beijing declared its intention to bypass the Hong Kong legislature and impose a draconian security law to shut down the protest movement. That single act effectively ended the island’s limited autonomy in the eyes of many residents and concerned international observers.

AFP reported on Friday that real estate and financial stocks were among the hardest hit as “investors fled for the hills with many worried about Beijing’s increasing influence in the semi-autonomous finance hub and what that could mean for doing business there.”

“Markets are now worried that the city’s freedoms – unseen on the mainland and protected by an agreement made before Britain handed the territory back in 1997 – could be curtailed,” AFP added.

In this respect, Beijing’s proposed security laws are even worse than the notorious extradition law that sparked the Hong Kong protest movement in 2019. The extradition law made both Hong Kongers and foreign investors worry about the island’s autonomy dissolving, which would jeopardize special trading relationships established on the basis of Hong Kong’s unique position as the tolerably free, attractively appointed lobby for the grim factory of totalitarian oppression that is China. 

There were also fears that the extradition law would make it easy for China to judicially kidnap foreigners by trumping up charges in China’s opaque, heavily politicized courts and using extradition to drag the victims away from Hong Kong.

Both of these concerns are greatly exacerbated by the security law proposal, so foreign investors are swiftly growing nervous about sending either their money or their personnel to Hong Kong, resulting in six to nine percent drops in key property and financial stocks, while the Hang Seng index fell by four percent overall on Friday morning. The Hong Kong dollar also dropped as a result of nervous sell-offs.

The silver lining in this dark financial cloud is that China has not revealed the full details of its security law or effectively imposed it through the rubber-stamp legislature in Beijing yet, and urgent international efforts are underway to persuade Beijing to back down.

“Traders around the world are playing the waiting game to see details of the new Hong Kong law to gauge how severe the terms are. And more specifically, the White House response to decide whether Hong Kong’s special economic status will be affected,” Stephen Innes of AxiCorp told AFP.

Secretary of State Mike Pompeo on Friday condemned China’s plan to “unilaterally and arbitrarily impose national security legislation on Hong Kong” and said China’s next move could significantly impact American policy toward Hong Kong.

“Hong Kong has flourished as a bastion of liberty. The United States strongly urges Beijing to reconsider its disastrous proposal, abide by its international obligations, and respect Hong Kong’s high degree of autonomy, democratic institutions, and civil liberties, which are key to preserving its special status under U.S. law,” Pompeo explained.  

“Any decision impinging on Hong Kong’s autonomy and freedoms as guaranteed under the Sino-British Joint Declaration and the Basic Law would inevitably impact our assessment of One Country, Two Systems and the status of the territory,” he warned.

MarketWatch saw the financial shock waves from Hong Kong hitting London on Friday, slamming U.K. stocks with heavy Hong Kong exposure hard enough to produce losses as high as eight percent. 

“Investors were also asking how the national security law in Hong Kong would affect U.S./China relations. The actions will stoke fears of another wave of protests in the country and cause unwanted disruption at a time when the region is trying to get back on its feet after the coronavirus crisis,” warned AJ Bell investment director Russ Mould.

CNN suggested China is calculating that its deadly coronavirus pandemic may have left the international community in general, and the UK in particular, too weak to resist the Hong Kong power grab. In CNN’s view, the UK is especially unlikely to pick a massive fight over Hong Kong because it is “dependent on trade with China to boost its flagging economy” now that it no longer belongs to the European Union.

CNN warned the security law “could end Hong Kong as we know it,” not only because the increased Chinese intelligence presence on the island will scare off foreign businesses, but because Hong Kong’s legal stability will be shattered by the brute-force implementation of Chinese Communist control:

“Implementation of the law in Hong Kong could also prove to be a nightmare for the city’s courts — which operate separately to the Chinese legal system and free of the political pressures put on mainland judges.

This does not mean the law is at much risk of being overturned, however. The NPC is the court of final appeal in Hong Kong and can issue an “interpretation” of any constitutional issue, essentially rewriting the Basic Law on the fly.

But the confusion and uncertainty the new rules may create, and a potential prolonged fight in the courts, could pose a major blow to the city’s reputation for upholding the rule of law, which has long been seen as vital for Hong Kong’s position as an international finance and business hub.

The South China Morning Post on Thursday predicted turbulence in the Hong Kong markets because the U.S. Congress was already mulling several regulatory actions that would damage Chinese tech companies. Analysts quoted in the piece suggested China could be planning to herd its tech giants away from foreign stock markets and back to a more tightly controlled Hong Kong, whose exchange would become a Chinese alternative to Nasdaq.

CNBC noted that major changes were made to Hong Kong’s Hang Seng index this week that make it more welcoming to big Chinese companies like Alibaba while also allowing them to remain listed in the U.S. stock market. This would have the effect of slipping billions of index fund dollars into those Chinese companies, as their stocks began appearing in more investment portfolios, possibly offsetting some of the financial damage from Hong Kong losing its special trade status.

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