On June 24, queues began snaking through the streets of the Mong Kok district from as early as 2am as people waited in line to purchase the last copy of newspaper Apple Daily.

Hailed as a symbol of the pro-democracy movement in Hong Kong, the scrappy tabloid fell victim to its constant criticism of Beijing and support for the 2019 mass protests. Owner and Hong Kong tycoon Jimmy Lai was arrested last year and was sentenced to 14 months in jail in April for his part in the demonstrations.

Then, on June 17, 500 police officers raided Apple Daily’s offices, arresting five executives for allegedly contravening Hong Kong’s broadly worded National Security Law (NSL). The authorities also froze HK$18 million of the paper’s assets, after earlier freezing nearly HK$500 million of Lai's Hong Kong funds. Apple Daily's last edition was published just seven days later.

The message of these actions is clear; Hong Kong’s press had best be careful how they report on politics or risk arrest. On Wednesday (June 23) the Foreign Correspondents’ Club in Hong Kong called Apple Daily’s closure “a blow to the journalism community in Hong Kong and raises legitimate concerns over the future of press freedom in the city”.

In truth, Hong Kong’s freedom of speech has been looking precarious for some time. Its ranking on the World Press Freedom Index has fallen from 18th in 2002 to 80th this year out of 180 entries. And experts have long said Beijing’s imposition of the NSL last year would allow Hong Kong’s authorities to silence perceived critics.

Will this heavy-handed approach affect Hong Kong as a financial and investment centre? In the short term, it seems unlikely – not least because the recent actions were broadly expected.

“The market had already factored in Apple Daily’s demise ... I don’t think Apple Daily’s closure will have more than a slight ripple effect on the stock market,” said Hong Kong-based consultant Neil Ramchandran.

The Hang Seng Index has certainly not registered much effect. After closing at 28,558.59 on June 17 it rose to 29,288.22 on Friday (June 25).

RISING RISKS

The longer-term picture for Hong Kong could prove gloomier.

Academic research has demonstrated a potential relationship between freedom of press and financial market performance. Reducing freedoms can erode the quality of information available to investment analysts, while increasing economic and political risks of doing business.

“Previous literature shows that media freedom affects the forecast quality of financial analysts and local media has a better role in disseminating local news and hence is more accurate in predicting local trading,” Trang Nguyen, a lecturer in accounting at the University of Glasgow, told AsianInvestor.

Higher levels of press freedom typically reduce economic and political risk in an economy, giving investors’ confidence to put capital into the markets and expect generally lower returns, Tuan Le, associate professor of economics at West Virginia Wesleyan College in the US found in his research, published in November 2020.

On the flipside, “investors would require higher returns for higher risk in markets that lack media freedom,” Le told AsianInvestor.

Added to that, political risk has been rising in Hong Kong since Beijing imposed the National Security Law. “It has definitely increased costs of coverage in terms of AML (anti-money laundering), having to look at clients’ risk profiles more closely,” said Ramchandran.

“We see additional costs for compliance… [For example] if we got something wrong, we used to get charged $25 million, but if we get it wrong now, your chief executive might go in [to prison],” he said.

Another potential consequence of Apple Daily’s closure is a hastening of Hong Kong’s brain drain.

The UK has issued more than 200,000 British National Overseas (BNO) passports this year, and predicts that 322,000 Hong Kongers will move there by 2025, according to Reuters. Visa applications to Canada and Australia have also risen noticeably.

“The brain drain is most concerning for me,” said a portfolio manager who declined to be named. "A lot of my ex-colleagues have looked to immigrate to other countries. There are quite a lot of vacancies because people are leaving the city."

UNDERMINING INSTITUTIONAL STRENGTHS

In fairness, both Singapore and China have demonstrated that it is possible to financially succeed without possessing strong press freedoms. The two markets respectively rank 160 and 177 out of 180 in the World Press Freedom Index, yet both have successful financial markets.

“China and Singapore are two interesting outliers,” Le said. “First, I would argue China has everything needed to become a financial hub in Asia, except for its media control.”

“Second, Singapore lacks media freedom but its other institutions (i.e., legal system, all levels of governments, education system, financial system, etc.) are strong.  In addition, its population is small and it has a unique geopolitical advantage. As a result, media freedom is not so important.”

However, Hong Kong may lean more upon the health of its press than those two markets. Zhiwu Chen, who is now a professor in economics at the University of Hong Kong (HKU), argued as a professor at Yale University in 2018 that “Hong Kong’s institutional infrastructure [is] centred on the rule of law, press freedom and an economically non-interventionist government.

“In particular, freedom of the press has been at the heart of its political, legal and economic infrastructure. These intangible institutions and traditions are the best asset of Hong Kong, and they hold the best hope for future prosperity.”

The imposition of the NSL and actions since by China and its Hong Kong functionaries appears to undercut all three areas identified by Chen (who did not respond to requests for comment). The imposition of the NSL is a political risk, the erosion of Hong Kong’s press freedom is obvious to all, and the government has become more interventionist in its use of the NSL to justify freezing individual and company funds.

The coming years will reveal whether these intangible institutions are as vital to the city’s long-term economic health as Chen has warned. China's political masters, and their Hong Kong-based subordinates, appear to be willing to take the risk.