President Trump Ends Hong Kong’s Status

This article contains commentary which reflects the author's opinion
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Hong Kong Now Treated as PRC

Recently, the People’s Republic of China (PRC) imposed the National Security Law on Hong Kong, ending most of the special rights and freedoms of Hongkongers. At the time of the 1997 handover of Hong Kong from Britain to China, the PRC government signed international agreements promising the people of Hong Kong and the world that Hong Kong would enjoys special rights and privileges for fifty years. Consequently, the US granted Hong Kong special treatment, freeing it from US tariffs and restrictions applied to trade and investment with Mainland China.

Over the past fifteen months, a continual crackdown by the PRC government has steadily eroded the special rights afforded Hong Kong. This has culminated with the PRC imposing the National Security Law. Secretary Pompeo was tasked with determining if Hong Kong’s rights and legal system were significantly different from those of the PRC and if Hong Kong still warranted separate treatment by the US. Secretary Pompeo advised the president that Hong Kong was no longer free.

President Trump has said that the National Security Law had changed the promised one-country-two-systems into one-country-one-system. Consequently, the US will now officially recognize Hong Kong and Mainland China as a single entity, with the same restrictions on trade, investment, and immigration. The Hong Kong Autonomy Act, signed by the president, recognizes the fact that China has now made the laws, freedoms, and rights of Hong Kong the same as Mainland China and, therefore, the US should stop treating the two entities differently. President Trump said, “”No special privileges, no special economic treatment, and no export of sensitive technologies.”

In his speech introducing the Hong Kong Autonomy Act, the president laid out a list of complaints about China. He noted China has stolen our factories, taken our jobs, gutted our industries, stolen our intellectual property, and violated agreements made under the World Trade Organization. Additionally, China has unlawfully claimed territory in the South China Sea. He also cited the fact that China appears to control the WHO although they only gave the organization $40 million per year while the US gave $540 million per year.

Implications and Sanctions

Beijing says that the National Security Law (NSL) applies to all people, anywhere on Earth. Article 38 of the NSL states that in addition to covering anyone in Hong Kong, regardless of nationality or residency status, it also applies to offenses committed against Hong Kong “…from outside the Region by a person who is not a permanent resident of the Region.” Theoretically, this means a US citizen, living in UK, who tweets in favor of Hong Kong democracy could be arrested upon entering Hong Kong. It remains to be seen if the NSL will cripple the ability of multinational firms to hire overseas talent. The question has also been raised as to whether it will even be safe to transit through the Hong Kong airport any longer. If not, international airlines may have to find a new transit hub.

Ending Hong Kong’s special status impacts a wide range of concepts such as exports of dual-use technologies. Currently, technologies that could have military applications may not be exported to China. This ban will now include Hong Kong. Additionally, Hong Kong citizens entering the US will be subject to visa restrictions similar to those for Mainlanders. The Fulbright and other academic exchanges will be halted. The US will no longer provide training for Hong Kong police.

There will be no more extradition treaty. Not only the US but many other free nations such as Canada, Australia, Britain, and some EU members are ending their extradition treaties with Hong Kong because the National Security Law allows extradition from Hong Kong to Mainland China. Under the new US law, those officials who are found to have reduced Hong Kong’s freedoms will be sanctioned, which could mean freezing their US-based assets. For financial institutions, the penalties could include not being able to get loans from US banks, not being able to participate in foreign-currency offers within the US, and a visa ban on their executives entering the US.

The US State Department has 90 days to identify institutions, companies, or individuals in Hong Kong that will be sanctioned. Once the list is released, US banks will have 1 year to stop doing business with them. Oddly enough, China has increased their holdings of US dollar debt in recent weeks. Many found this strange because of the increasing tensions between the two countries. One of the reasons China took this step, however, is because it can no longer count on obtaining hard currency through Hong Kong.

Due to a combination of Coronavirus issues and ongoing protests, arrivals in Hong Kong are down by about 99%. US restrictions and sanctions are expected to further reduce the amount of US dollars that will be flowing into and through Hong Kong. All of the above, plus the National Security Law, could very well trigger an exodus of qualified Hongkongers, foreign executives, and multinational firms, which will further exacerbate the problem. Consequently, China has had to go on global foreign exchange markets and buy dollars.

Driving the Economy Down

In 2019, largely because of the Hong Kong crackdown and human rights concerns, foreign direct investment (FDI) into Hong Kong dropped by 48%. The Hong Kong Autonomy Act increases the threat on the Chinese economy because, “Economists estimate that investment flows through the city account for more than 70 per cent of China’s international funding.” Markets are already beginning to react to worsening tensions. The announcement that the PRC had forced the US consulate in Chengdu to close has caused the Shenzhen stock market to drop 5%, while Hong Kong’s Hang Seng fell 2.2%.

Currently, the Hong Kong dollar is pegged to the US dollar. Many economists anticipate that the ending of Hong Kong’s special status by the US will drive the Hong Kong dollar down to such a degree that the Hong Kong dollar would have to unpeg from the US Dollar. Other US legislation, requiring Chinese firms to meet transparency requirements or delist from US exchanges, has driven and is driving many Chinese firms to list in Hong Kong. This has helped keep the Hong Kong dollar from crashing but the long-term outlook for the currency is not good.

A Massive Exodus

Hong Kong officials have said that employees of the Taiwan representative office, the de facto embassy, have to sign a document stating that they agree to the one-country-two-systems as a condition for remaining in Hong Kong. As Taiwan cannot agree to be part of PRC, it seems this will force them to close their representative office. In addition to hampering trade and investment between Taiwan and the Mainland, this would also end visa runs by Americans and other foreigners working in Taiwan, further reducing visits to Hong Kong and the influx of hard currency.

The National Security Law and the Hong Kong Act will make it more difficult for Americans to live and work in Hong Kong. Currently, more than 1,300 US firms are based in Hong Kong. There are also roughly 85,000 Americans who currently live there. The US State Department increased the severity of its China travel advisory and now includes Hong Kong, citing the threat of arbitrary detention and the imposition of exit bans.

Foreign companies in Hong Kong will have to evaluate what the National Security Law and the Hong Kong Act means to their continued presence and ability to function there. Straight away, companies exporting out of Hong Kong will now be subject to the same tariffs as those placed on Mainland China. One of the advantages to operating out of Hong Kong has been the easy convertibility of currency but this may change if the Hong Kong dollar unpegs from the US dollar. Another advantage to having had a company based in Hong Kong was the low taxes, a mere 15 percent. However, China has now announced an increase in taxes, applying a global tax rate of 45%.

The Brain Drain

In the past, many multinational companies chose to operate out of Hong Kong because of the large pool of talented, well-qualified, and English-speaking staff. That may also be ending as Hong Kong prepares for a major brain-drain. After more than a year of protests and heavy crackdowns by the police, many Hongkongers are considering leaving Hong Kong. The imposition of the National Security Law has been seen by many as the last straw.

Hongkongers who were born before the 1997 handover were granted a British National Overseas (BNO) passport. Recently, Britain has stated that they will be offering citizenship to BNO passport holders. Beijing, however, has said that it may not recognize the BNO passports. It is estimated that there are 3 million BNO passport holders in Hong Kong, representing about 40% of the population. This political limbo may cause them to leave sooner, rather than later, before China closes the door.