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Hong Kong Security Law Jolts International Business

07/02/2020 | 03:00pm EDT

By John Lyons and Frances Yoon

HONG KONG -- As China drew up a new security law for Hong Kong last month, its top Foreign Ministry official in the city gathered international business groups and diplomats to deliver a message from Beijing: Don't panic.

The law would target only a small group of radicals and wouldn't impede the free market ethos behind Hong Kong's rise as a global business hub, the official said. But now that businesspeople are finally seeing the law, there is much to cause concern.

While no one expects the giant money flows coursing through Hong Kong to cease anytime soon, the law sets in motion fundamental changes that threaten to erode the city's special role as a gateway connecting Western finance and know-how with China Inc.

"Businesses were kind of waiting and laying their bets to see how bad it would be, and then it turns out it is really bad," said Christopher Hughes, a London School of Economics professor of international relations who focuses on Chinese foreign policy. "I wouldn't be surprised if changes happen faster than you think."

The law targets four political crimes: secession, subversion, terrorism and foreign interference. But lawyers said its wording is so broad that it is easy to imagine how a business dispute with a Chinese company could end up construed as a breach of the law, putting executives at risk of prosecution.

The new law also threatens the unfettered communication and information flows that underpin global markets. It directs Hong Kong to toughen its regulation of the internet and gives authorities the power to intercept electronic communications and conduct warrantless searches. Mainland agencies will oversee foreign media in the city. Meantime, crimes such as revealing state secrets in theory could be interpreted to include market research or financial analysis on state firms.

Perhaps most significantly, the court system that Hong Kong inherited from the British and has operated separately from the mainland will be superseded by Chinese courts.x Security authorities may intervene in Hong Kong cases under a range of scenarios and move them to a mainland system where proceedings may be secret. The penalty for many crimes under the law is life in prison.

Those are significant deterrents for some professionals, and many executives worry privately that growing Chinese encroachment on the city's freedoms will hurt their ability to recruit and retain talent.

"I criticize the Chinese government online all the time, and the idea that I will be subject to less freedom worries me," said Christine Yang, a Hong Kong lawyer at a company that makes personal protection equipment. Among the broadly worded crimes in the new law is provoking hatred against China's central government.

Ms. Yang said she has found a new job outside Hong Kong and is preparing to move with her two children in July. She worries about the provisions in the new law that let Beijing override Hong Kong's justice system.

"They're basically going to be running their own game, and that is concerning," she said.

Beijing pushed through the national security law Tuesday in a bid to crush a year of pro-democracy, anti-China unrest in Hong Kong. The former British colony has largely governed itself since it was returned to China in 1997 under an arrangement called "one country, two systems," but its laws leave some room for the mainland to impose legislation on the city.

Hong Kong's stock market fell nearly 6% when Beijing revealed its plans for the national security law in late May. But it has risen in recent days, more than making up the losses on optimism the law will end the turmoil that has hurt the city's property prices and economic growth. The rising stock prices also reflect the fact that much of the money flowing though Hong Kong's markets comes from business with mainland Chinese investors and firms.

Bankers say Chinese companies will continue to use Hong Kong to raise capital, as JD.com Inc. and NetEase Inc. did this year, and that their mainland clients support the new law. For people who understand China, "there's no change," one venture capitalist said.

Market activity isn't likely to be hurt in the short term, said Weiheng Chen, a partner at Wilson Sonsini who works on capital-market transactions and mergers. But there could be an impact on longer-term commitments of foreign capital until the international business community sees how the law will be enforced, he said.

China has vowed its crackdown will target protesters and not law-abiding businesses. But it may become difficult to separate the two in practice. Many of the hundreds of thousands of protesters that took to the streets are also employees at major firms. Their arrests will raise tricky moral and legal issues for corporate lawyers.

It is far from clear the new law will quell the unrest. Millions of Hong Kongers oppose mainland interference and see the law as an unjust campaign to destroy the individual freedoms they have long enjoyed. Thousands took to the streets Wednesday, the first day the law was in force. Police responded by firing pepper rounds and water cannons at the crowds and arresting around 370 protesters, including 10 for violations of the new law.

China's decision to enact the law has provoked an international backlash that may also damage the business climate. The U.S., saying Hong Kong is no longer autonomous enough to be treated separately from China, has banned exports of dual-use technology to the city and has threatened to take other measures such as sanctions.

At the American Chamber of Commerce in Hong Kong, some 60% of respondents in an early-June poll said they believed the law would harm their business. Some 30% of companies said they were already considering relocating some operations or assets.

"It will take time for the business community to digest details of the law, but we hope it will not impact the dynamism and benefits of this great city," the American Chamber said Thursday.

Hong Kong is an enormously lucrative place to do business, and the prospect of profiting from China's huge market gives companies a strong incentive to adapt to the new environment rather than retreat. Despite the unrest and a pandemic, nearly $135 billion in funds was raised on Hong Kong's stock exchange in the first five months of the year, up 27% from a year earlier.

The city was founded in the 19th century as a trading hub for narcotics, silk and tea during Britain's Opium Wars. It has overcome challenges in the past and always emerged intact as a profitable global business center. Many people predicted its demise before the 1997 handover; but with a stable currency and British-style legal system, it became a preferred place for Western investors to access the enormous flows of capital and trade generated by a growing China -- all while living as they always had in the city.

Some in Hong Kong said the passage of the security law feels like the real handover. Over time, observers said, the business environment may come to resemble something closer to that prevailing in mainland China, as the city's legal system, government and economy become more integrated.

"Whatever precautions businesses take in mainland China -- for example, ensuring that laptops and mobile devices do not contain sensitive, unencrypted data of interest to Chinese authorities -- should now be extended to Hong Kong," a report on the new law from the business consulting firm Teneo warned.

Most international firms in Hong Kong already do business in the mainland and have accepted the risks that come with operating under an authoritarian system -- such as possible snooping by security agencies -- and are schooled in understanding where government sensitivities lie.

"They understand doing business is different from stepping into the politics arena," said Iris Pang, chief economist for Greater China at ING Bank NV in Hong Kong.

Corporations that rely on China for significant parts of their revenue face pressure not only to adapt to the new environment, but to praise it. In June, London-based banking giant HSBC Holdings PLC, which makes most of its profit in Hong Kong and mainland China, posted a photo of its Asia chief signing a petition in favor of the national security law.

The show of support for the law came after a former leader of Hong Kong criticized the bank for remaining silent on the bill. "HSBC's businesses in China can be replaced overnight by banks from China and from other countries," warned former Chief Executive Leung Chun-ying.

Businesses, from luxury brands to airlines, have decided to bend to China's demands on issues such as freedom of speech rather than lose access to the market. Last year, the chief executive of Hong Kong's flagship airline, Cathay Pacific, stepped down after it came under pressure from Beijing over employee support for the pro-democracy protests.

Before the security law was even drafted, the executive director of Hong Kong real-estate giant CK Asset Holdings Ltd., Justin Chiu, told reporters that the measure will leave people "more at ease about the future and stability of Hong Kong."

While many big companies publicly voice support for the law, some foreign executives at multinational firms privately acknowledge they are hedging their bets. Some have taken their children out of Hong Kong schools and placed them in boarding schools elsewhere so their education won't be disrupted if they decide to leave at some point next year. Others are moving assets and staff to other cities in the region.

Youssef El Kaddioui, who runs an online sales company in Hong Kong, is moving some operations to Singapore out of concern that the unrest may continue and foreigners could be targeted in enforcement of the law, he said.

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07-02-20 1459ET

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CATHAY PACIFIC AIRWAYS LIMITED -3.64% 8.46 Delayed Quote.32.39%
CK ASSET HOLDINGS LIMITED -0.46% 54.55 Delayed Quote.10.99%
HSBC HOLDINGS PLC 0.29% 550.5 Delayed Quote.22.70%
ING GROEP N.V. 0.83% 9.49 Real-time Quote.-22.48%
NETEASE, INC. 0.39% 91.88 Delayed Quote.-9.73%
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