How Hong Kong's New Security Law May Affect Local Investments

The Chinese government’s new national security law drew international pushback as it took effect Tuesday in Hong Kong.

China says the law aims to prevent secession, terrorism, foreign interference and attempts to subvert state power — but critics say it undermines the former British colony’s economic and legal autonomy.

What Happened: The European Parliament voted to bring China before the International Court of Justice if its law were to violate Hong Kong citizens’ rights. The U.S. Senate passed a bill to impose mandatory sanctions on companies and banks that even indirectly support China’s efforts to control Hong Kong, and the Trump administration began Monday to reverse Hong Kong’s special trade status by prohibiting defense exports and restricting tech access.

“With the Chinese Communist Party’s imposition of new security measures on Hong Kong, the risk that sensitive U.S. technology will be diverted to the People’s Liberation Army or Ministry of State Security has increased, all while undermining the territory’s autonomy,” U.S. Commerce Secretary Wilbur Ross said in a Monday statement.

“Further actions to eliminate differential treatment are also being evaluated.”

News of the law’s passage triggered the disbandment of Hong Kong’s pro-democracy party, Demosisto, which feared the life imprisonment that is said to be the strongest penalty under the law.

Hong Kong Chief Executive Carrie Lam insisted that the law would not dramatically alter life or interfere with the independent judiciary in Hong Kong, but instead would instead inhibit a “small minority of illegal and criminal acts.”

How It Could Affect The Markets: Some economists and analysts have suggested the law could inspire self-censorship of investment research, particularly in analysis of local and political news.

“Obviously there are reasons for nervousness that didn’t exist a year ago,” Simon Cartledge, head of Hong Kong-based research company Big Brains, told the Financial Times.

Self-censorship could limit local financial organizations’ credibility or encourage corporate fraud. 

A “crackdown on free speech ... means that critical speech against companies that commit fraud is going to suffer as well,” Hindenburg Research founder Nathan Anderson told the Financial Times.

“Activist short selling is premised on the right to be critical ... of often powerful companies — and at times governments [and] government officials.”

Anderson told the publication that the security law deters him from establishing an office in Hong Kong.

Some economists expect such reactions to stunt Hong Kong’s global financial activity.

Some Banks Have A More Positive Take: Still, certain banks conducting local business, including HSBC and Standard Chartered, have backed the law, and other investors dismiss suggestions that the law — and retaliatory regulations by peer states — will hurt Hong Kong’s global position in finance and trade.

"The removal of the special status should not have much impact on investment by US companies in Hong Kong unless there is retaliation in terms of sanctions from Mainland China on U.S. entities based in Hong Kong, which is unlikely," Iris Pang, chief economist for Greater China at Dutch bank ING, said in a research note reported by Al Jazeera.

David Dodwell, executive director of Hong Kong-APEC Trade Policy Group, told CNBC that, depending on the content, a security law is welcomed by the business community.

Related Links:

Twitter Shuts Down More Than 170,000 Accounts Linked To Chinese Government

Chinese Companies Delay US Listings Due To Escalating Tensions