Beijing’s plan to impose a national security law on Hong Kong has rattled the nerves of the investment community, will likely trigger another wave of capital outflow and could make it harder to attract foreign professionals. However, international financial firms that regard China as a strategic market are seen likely to continue to keep their presence in the territory.

The new law comes after nearly a year of social unrest in Hong Kong, which has already prompted some of the city's wealthy to shift assets out of Hong Kong. Some bankers believed the new law will lead to more capital flight as the territory will likely see an extended period of turmoil with more protests expected to disrupt businesses and commuters.

Adding to the uncertainty, White House National Security Adviser Robert O'Brien said on Sunday (May 24) that China's proposed national security legislation for Hong Kong could lead to US sanctions and threaten the city's status as a financial hub.

Robert O'Brien, White House 
national security adviser

Despite rising concerns over the territory’s future, market experts told AsianInvestors they believe most foreign firms will still need a presence in Hong Kong to expand their footprint in mainland China.

The new law is negative for Hong Kong in the near term because it will probably trigger more social unrest, which is never good for the capital market, a Hong Kong-based investment executive of a European asset manager told AsianInvestor.

For financial services firms that are here to cover China, the new law is less of a problem, she said, but for those that are here to cover Asia, it is probably a bit negative. Rule of law, transparency and freedom of speech are important factors to consider, she added.

There is no other place in Asia that is more suitable than Hong Kong for a foreign firm that wants to develop its banking, financial, or asset management business in the China market, a Hong Kong-based senior executive at a joint-venture financial firm told AsianInvestor. 

"They must set up a branch in Hong Kong to enter the big China market,” he said. With the renminbi unlikely to be fully convertible in the near term, Hong Kong, with its financial infrastructure and legal system, will still be an important international financial centre in Asia, he said.

An increasing number of global financial firms are making long-term plans in the China market, especially after China relaxed foreign ownership rules early this year. Most recently, HSBC Life said it is in the process of acquiring the remaining 50% equity interest in HSBC Life China, its life insurance joint venture with National Trust.

Meanwhile, some also believe that Hong Kong’s role as a global gateway to access China has become more important at a time when US-China tensions are at fever-pitch.

People tend not to trust the legal regime in China, and that is causing a lot of fear about how China’s rules will apply to Hong Kong, a locally based managing director of a family office told AsianInvestor. 

However, Hong Kong’s value proposition has risen amid deteriorating China and US relations because China needs Hong Kong to act as a foreign exchange centre, among other functions. US institutions also need Hong Kong to conduct business activities in mainland China, he said.

INVESTORS’ CONCERNS

The resolution, which bypasses local legislation procedures in Hong Kong, is scheduled to be put forward at the ongoing National People’s Congress (NPC) on Friday (May 29). The new law is intended to prevent, stop and punish acts in Hong Kong that threaten national security. It encompasses secessionist and subversive activity as well as foreign interference and terrorism.

However, the new bill also risks undermining the "One Country, Two Systems" political arrangement that embodies Hong Kong’s appeal with international companies and investors. Some members of the public are worried that Hong Kong’s rule of law will be shaken, and their freedom and rights will be eroded when the new law is enacted, prompting some to move capital out of the city.

“Changing the [fundamentals of the] basic law raises important concerns, from an international perspective, about the rule of law, the protection of foreign investors, the integrity of the Hong Kong dollar and the financial infrastructure in Hong Kong,” a senior executive in charge of institutional investors at an international custodian told AsianInvestor.

“I’m sure the Chinese will be rushing to say that none of this will be affected, and this is focused on sedition. But it creates a lot of uncertainty. And we have seen cases in the past where some financial analysts or individuals have gotten themselves or their firms into trouble for criticising China. It worries me,” he added.

Chinese foreign minister Wang Yi sought to ease concerns about the new law, saying it would not damage the city’s autonomy or freedoms. Hong Kong chief executive Carrie Lam also said the law would enhance Hong Kong's status as a global financial centre, rather than damage it.

Joseph Yam, Executive Council member and former chief of the Hong Kong Monetary Authority, said the legislation will consolidate Hong Kong's position as an international financial centre, because foreign investors, issuers, and professionals in financial intermediaries all hope to work and live in a stable society.

Even Victor Li, the elder son of Hong Kong’s tycoon Li Ka Shing, who seldom comments on politics, said in an email that he hopes that a security law proposed by Beijing would help the semi-autonomous Chinese city bounce back from months of social unrest.

Richard Morrow contributed to this story.