With no recognised rule of law, Hong Kong will become a high risk environment.

 

LONDON: Once again our screens are full of pictures of tear gas and pepper spray on the streets of Hong Kong, as citizens protest against the erosion of their liberties. This week the Chinese National People’s Congress meeting in Beijing overwhelmingly passed a new security bill, which will insert a law directly into Hong Kong’s Constitution that whittles away at its “one country two systems” status. The bill is designed to destroy the civil liberties enjoyed by Hong Kong’s people for over a century.

Little by little, Beijing is violating the “one nation, two systems” international treaty with Britain, a joint declaration filed at the United Nations, when the colony was handed back on 1 July 1997. The agreement was designed to ensure that the socialist system of China would not be practised in the “Special Administrative Region” of Hong Kong for a period of 50 years, allowing its capitalist system and open way of life to remain unchallenged until 2047.

Xi is employing the oldest political trick in the book to achieve his aim of changing Hong Kong. First he proposed some reforms in Hong Kong’s electoral system. Nothing too extreme of course, just enough for democracy lovers, sensing danger, to take to the streets in a protest which became known as the “umbrella movement” in 2014. Beijing was initially taken by surprise at the extent of the protest, peaking at more than 100,000 at any given time, but the protests ended without any political concessions from the government. Chinese state media, of course, claimed that the West had played an “instigating” role in the demonstrations and warned of “consequences”. These have now arrived.

Hong Kong is one of Asia’s largest financial hubs and China’s gateway to the global financial system. It’s also China’s key conduit to the West for foreign trade, with about $1 trillion flowing through Hong Kong each year. The freedom and strong rule of law bequeathed by Britain helped make Hong Kong a thriving centre for international banking and finance. As a result, top firms flocked to the former colony, encouraged by the independent legal system and a strong tradition of transparency. Take a look at the skyline in the business sector with all the big names on display and it’s not hard to be convinced that Hong Kong has become a magnet for overseas businesses. This has made Hong Kong extremely wealthy and the ideal place for hugely wealthy Chinese, including senior party officials and their families, to store and hide their wealth.

Crucial to Hong Kong’s success is the “special status” granted by America, which has resulted in more than 1,300 US companies having their operations there. The upshot of preferential trade agreements between US and Hong Kong is $67 billion in bilateral trade each year. All this is now at risk due to President Xi’s aggressive action. So why now?

Xi Jinping clearly sees this as a moment of weakness in a West preoccupied with the coronavirus, the perfect time when he can remove a persistent thorn in his side. In his mind, Hong Kong contains a “virus” even more dangerous than Covid-19, which must be eliminated before it spreads to mainland China and destroy everything he believes in. The “virus” of freedom and democracy.

The new law is also a convenient method of distraction from the implosion in China’s economic growth rate as a result of the pandemic. China watchers have noted that mainland web users overwhelmingly support the new law, showing zero sympathy for Hong Kong protestors. Posts on Weibo, the Chinese Twitter, are full of comments such as “we can now finally punish the Hong Kong student thugs”. Increased nationalism is a classic way of defusing the social unrest that could flow from rising unemployment in China. Promoting nationalism in order to diffuse internal problems comes straight out of the “Putin” playbook.

The danger to Beijing is that the new law could kill the goose that lays the golden egg. If a soured environment diminishes Hong Kong as a financial and trade centre, this could play straight into America’s hands. Already the China hawks within the administration consider Xi’s move to be a big mistake, one which will allow it to “welcome back” American companies from Hong Kong and the mainland. Promises have even been made to cover the costs of moving, if businesses return their supply chains and production to the United States. A “re-shoring” fund of £25 billion is currently being considered in Washington. The repatriation of US investment and activity would also fit neatly within the Trump administration’s trade policy and his own prejudices about trade.

Last week, Secretary of State Mike Pompeo formally advised Congress that the American government no longer believes that Hong Kong has sufficient autonomy from Beijing, opening the way to ending some or all of the preferential trade agreements and economic privileges. On Friday, President Trump confirmed that his administration would indeed move to revoke Hong Kong’s special trading status. He accused China of planning to stifle the opposition and criminalise anti-government movements, such as the pro-democracy demonstrations seen in the territory in recent years. “Beijing’s action”, Trump said, “was a clear violation of its treaty obligations. China has replaced its promised formula of ‘one country two systems’ with ‘one country one system’.”

As a result of the steps taken by the Trump administration, which are yet to be detailed, Hong Kong is likely to lose its lustre as an important financial and commercial centre. With no recognised rule of law, it will become a high risk environment. Businesses will not want to be dragged into disputes in Chinese courts and will re-locate to safer environments, rather than disappearing into a black hole. Hong Kong will become a cheaper, diminished financial city, with lower salaries attracting fewer top talent from around the world. Once a downward spiral starts, it’s hard to stop.

In this event, President Xi Jinping will have shot himself in the foot.