Cut off from the world and brought closer to Beijing’s orbit over the past three years, Hong Kong has discovered that its fortunes are increasingly tied to China.
The city’s stock market, seen as a proxy for China’s economy, has been among the world’s worst performers this year. The rivers of money that flowed into companies, creating new wealth, have slowed to a trickle.
And there’s the nagging sense that the once vibrant international city that staked its reputation on being apart of China has become more like the rest of China.
To counter this sentiment, officials are making a big push for investors abroad, with trips to Europe and the United States. Paul Chan, the city’s finance chief, is visiting Paris and London this week and will then travel to Berlin and Frankfurt before moving on to the United States.
Mr. Chan, however, is in a tight spot.
Hong Kong, a former British colony, owes much of its success as the world’s financial capital to its semiautonomous status under “one country, two systems,” which was promised during the British handover of Hong Kong to China. in 1997. Political accommodation ensured that Hong Kong could exercise a high degree of autonomy over its governance and laws, allowing it to protect rights and freedoms not granted elsewhere in China.
A national security law implemented in 2020 by Beijing in Hong Kong after mass protests undermined this autonomy. Under the broad and vaguely worded law, any politician who was unpatriotic in Beijing was purged or punished by the government. Officials pledged loyalty to the “motherland”; free speech was revoked and dissent was destroyed.
Addressing concerns that Hong Kong is losing its identity, Mr Chan told politicians and business leaders in Paris: “Hong Kong’s single ‘one country, two systems’ is alive and well.”
But Hong Kong’s political changes have heightened tensions and hardened geopolitical lines between China and the West, affecting how Western businesses operate in Hong Kong, including some that have stopped and left .
“It’s pretty clear that Paul Chan and his ilk are trying to toe the line,” said Andrew Collier, managing director of Hong Kong-based research firm Orient Capital. “If you looked at Hong Kong as a safe harbor from mainland politics, that view has changed.”
As many foreign businesses that remained in Hong Kong tried to adapt to the new political environment, they were given reasons for new concerns.
In July, the city’s chief executive, John Lee, offered financial rewards for any information leading to the arrest of eight pro-democracy activists who fled Hong Kong’s national security law in places like the United States and Britain. On his appeal, he said they should be treated like “street rats,” adding that police will “vigorously pursue” anyone who threatens national security in the city. This week, Beijing ordered consulates in Hong Kong to hand over personal information about all local staff, including addresses and passport and identification numbers, bringing the city into line with rules elsewhere in the China.
Against the backdrop of shifting regulations, law firms in Hong Kong are struggling to counter a perception among clients that the legal landscape has deteriorated, said Lester Ross, a corporate lawyer in WilmerHale’s Beijing office who works with lawyers in Hong Kong.
“There has been a loss of confidence in the Hong Kong legal system,” Mr. Ross said. “Real or imagined, that feeling is very real.”
The erosion of rights has also hampered the ability of investors, financial analysts and academics to speak freely. Companies are choosing other jurisdictions, such as London and Singapore, for international arbitration out of concern that Hong Kong is no longer neutral. Many clients have also expressed concerns to their lawyers about the privacy of their communications in Hong Kong.
“I understand these concerns,” said Lau Siu-Kai, a senior adviser to the Chinese government on Hong Kong policy. “But you must remember that this national security law is still a new law, and both China and Hong Kong are learning how to effectively implement this law.”
In a lunch last week, Mr. Chan addressed concerns about whether foreign businesses can still trust Hong Kong law. He sure a group of foreign businessmen and diplomats that the city’s common law system, a foundation of investor and business confidence, is intact and that Xi Jinping, China’s top leader, has promised to respect the system of governance of Hong Kong.
Beijing’s promises, however, do little to ease concerns about the city’s independence.
Concerns have been simmering for several years. But they are being brought front and center as China’s economic collapse, the worst in decades, spills over into Hong Kong. Like the rest of China, Hong Kong is struggling to revive its economy after strictly following Beijing’s “zero-Covid” pandemic policy, which has left it cut off from the world for much of the past three years.
This spring, the city finally emerged from its third recession in four years. But in recent months, growth has slowed, and economists are once again revising their expectations.
Chinese tourists, who once made up the majority of visitors to the city and outspent other visitors, are coming back, but they’re not spending as much as before. Officials have given out half a million tickets for flights to the city through the “Hello Hong Kong” campaign, but tourists from overseas have been slow to return. Hong Kong’s international airport, Asia’s busiest before the pandemic, has ceded that title to regional competitors Seoul and Bangkok.
Hong Kong’s stock market has been battered by investors worried about China’s economy. So far this year, Hong Kong’s stock market has fallen more than 11 percent, making it the fourth-worst performing stock market in the world. This gloom has reduced the appetite of Hong Kongers to spend.
Some Western investors are now pulling away, amid broader geopolitical tensions that have prompted American officials to ban investment in some Chinese companies.
“If US-China relations were not so bad, the stock market would be doing better,” said Simon Lee Siu-po, a senior lecturer at the Chinese University of Hong Kong. “If China’s economy is better, the stock market will perform better, too,” he said.
The prospects are also not good for companies listing their shares publicly in Hong Kong. Companies this year raised just $2.7 billion, the lowest amount in two decades, according to the latest data. Stricter rules for Chinese companies that want to list outside mainland China, as well as Mr. Xi on private enterprises in China, dampened optimism.
The list of conglomerates to be broken up in China is growing, prompting more questions about corporate governance standards in Hong Kong, where most of them are listed.
HNA Group, a Chinese conglomerate that was once China’s biggest dealmaker, filed for bankruptcy in 2021 and later disclosed that nearly $10 billion of its cash had been siphoned off. Last year, auditors resigned for more than a dozen Chinese property companies listed in Hong Kong, according to Reuterss, drawing attention to industry and corporate governance issues.
Financial uncertainty and political changes make Hong Kong seem, to some investors, like any other Chinese city.
But the Chinese government believes it can seize more political control over Hong Kong while keeping it distinct as a financial center.
“China wants Hong Kong to use ‘one country, two systems’ to play a role that no other Chinese city can play,” said Mr. Lau, the senior adviser in Beijing. “If you compare Hong Kong with other Chinese cities, why are so many companies still trying to raise capital in Hong Kong? They see Hong Kong as a different place to Shanghai or Beijing.”