In recent days, there have been numerous discussions with regard to the possibility of companies shifting from Hong Kong, after the imposition of China’s National Security Law (the legislation came into effect on July 1, 2020) in the former British Colony.
Not just the UK, but the US, Australia, New Zealand and Canada have reacted strongly, and taken some strong measures against China’s decision to impose the law in Hong Kong.
The Boris Johnson Administration stated that the imposition of the National Security Law clearly violated the ‘Basic Law’ (or mini constitution) which had clearly put in place a ‘one country, two systems’ arrangement. The basic law provides important civil liberties, such as the right to protest, freedom of speech and the independence of the judiciary to residents of Hong Kong. As a result of the implementation of the National Security Law, the above provisions can be violated.
In order to send a strong message to China, the UK withdrew its the extradition treaty with Hong Kong on 21 July on the grounds, that individuals extradited to Hong Kong could be extradited to China. The UK also extended the arms embargo on mainland China to Hong Kong (firearms and smoke grenades will not be exported to Hong Kong as a result of this).
Canada, Australia and New Zealand have suspended their extradition treaties with Hong Kong, much to the chagrin of China, which perceives this as interference in the internal matters of China. China has retaliated by suspending Hong Kong’s extradition treaties with Britain, Australia and Canada.
US President Donald Trump has ended preferential economic treatment for Hong Kong and signed a legislation penalizing banks doing business with Chinese officials who enacted the national security law in the city.
IT companies shifting from Hong Kong
One sector impacted by the National Security Law is the tech sector. It is being argued, that overseas IT companies, based in Hong Kong may examine the possibility of relocating data from Hong Kong. South Korean portal, Naver has shifted servers (which store the personal data of its clients) from Hong Kong to Singapore, because there are certain provisions in the national security law, which impinge on internet freedoms and give the police authority to take strong action against data providers – including those who are not residents of Hong Kong. Article 9, Article 38, and Article 43 of the National Security Law are especially important in this context.
Article 9 of the National Security Law states that the Hong Kong Government: “shall employ necessary measures to strengthen publicity, guidance, oversight and management in schools, social organisations, media, networks and other matters related to national security.”
Article 43 permits the Police and other law enforcement agencies of the Special Administrative Region of Hong Kong to not just search ‘devices’ and other places which may contain evidence of an offense, but also requires persons/ related service providers to remove information or assist the law enforcement agencies.
Another article which is important is 38 under which non-residents can be prosecuted for acts of secession, subversion, terrorism and collusion pertaining to Hong Kong, even if committed in another country.
Some observers have also argued, that not just data companies, but even Financial Companies may shift to other countries including London, New York, Singapore. According to a survey by the American Chamber of Commerce, a large number of US companies (estimated at 30%), could seek to relocate from Hong Kong as a result of the National Security Law.
Why Hong Kong may become a more attractive destination
While it is true, that some companies may seek to relocate from Hong Kong. It is important to bear in mind the point, that as a result of the National Security Law, Hong Kong will be better integrated, into what is called the Greater Bay Area (GBA) which consists of Hong Kong, Macau and 9 cities in Guangdong Province (the GBA accounts for 12% of China’s GDP, and its economic output is estimated to be a staggering 1.5 Trillion USD).
Only recently, Singapore was perceived as one of the preferred destinations for investors seeking to relocate from Hong Kong. Interestingly, Keppel Capital, the asset management arm of Singapore’s conglomerate Keppel Group, has made a commitment of 1.5 billion yuan (US$213.8 million) to build a data center in Huizhou (which is one of the 11 cities within the GBA). This happens to be Keppel’s second such investment in the Greater Bay Area, the earlier investment was in Hong Kong.
Policies to make the GBA and Hong Kong attractive to investors
A number of companies, which draw their revenues from China are attracted by this. Second, China has come up, with new policies which will make Hong Kong and Macau more attractive for investors. While Beijing has already announced the Wealth Management Connect.
China has also announced the Wealth Management Connect, which will allow mainland investors, from the GBA, to buy financial products in Hong Kong and Macau, and vice versa.
The other scheme which will integrate Hong Kong with mainland cities in the GBA is the ‘insurance connect scheme’. According to this arrangement, there will be two service centres in mainland cities within the Bay area (with Shenzhen likely to be one of them). Hong Kong Insurance companies will be allowed to set up counters in these centers. In the first stage, cross border sales of policies will not be permitted. Hong Kong based insurance companies will be able to provide services such as handling claims, changing policyholders’ information and processing payment of premiums.
It would be pertinent to point out, that a large percentage of mainland Chinese invest heavily in Hong Kong’s insurance sector
Investments in the GBA
In conclusion, while it is true, that the west has reacted strongly to China’s decision to impose the National Security Law in Hong Kong, it is important to be realistic, as far as understanding the economic impact of this decision is concerned. Those companies seeking closer integration with China are unlikely to shift.
Beijing is also likely to focus on developing the GBA, and also bringing in policies which makes the GBA more attractive for investors. Thus while certain western IT companies may chose to relocate from Hong Kong, yet it’s location and proximity with China may also help in attracting many companies.
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