The Chinese government appears to be making a cynical calculation: the chaotic behaviour and erratic leadership of US president Donald Trump plus the worst global outbreak of disease in 100 years makes this a good time to consolidate power in Hong Kong, its unruly semi-autonomous territory.

There's also a limited window: in September Hong Kong will hold legislative council elections, in which the pro-Beijing parties look set to see their number of seats heavily cut. Meanwhile, the ongoing impact of Covid-19 and economic sanctions is raising the potential for discontent on the mainland.

And so China has gone about leaning on Hong Kong, using brute political force overlaid with a patina of legitimacy.

By passing a motion at the National People’s Congress meeting to write national security laws into the Basic Law of Hong Kong by 2,878 votes to 1, China’s rulers could claim the move was legal and justified to their billion-strong local populace.

Carrie Lam,
Hong Kong's chief executive

Hong Kong chief executive Carrie Lam lost no time in declaring she will implement the laws through the legislative council in Hong Kong. The chief executive claimed that “Hong Kong’s freedoms will be preserved” by the new rules, along with the independence of the judiciary.

This time it appears no level of protesting, peaceful or otherwise, will stop her – or Beijing. Hongkongers looking to boo the Chinese anthem at sporting events or burn the country’s flag will do so at the risk of arrest and imprisonment.

Yet despite the seeming inevitability of the rules sailing through Hong Kong’s stacked local government, Beijing appears to be going to some lengths to pretend that the new laws are being welcomed.

On Thursday (May 28), Nikkei reported that state-owned banks and brokerages had been sending ‘voluntary’ petitions of support for the incoming national security law to their employees in Hong Kong. Human resources heads did not explicitly state the consequences for those who refuse to sign at a time of soaring unemployment, but they didn’t really need to.

Such actions will only reinforce foreign country fears about the insidious influence of Beijing on its companies. It’s most unlikely to gain them a warmer welcome offshore.  

For all of Lam's proclamations that nothing will change, investors did not share that sanguinity; the Hang Seng index plunged 5.56% last Friday (May 22), the day after the motion for the new law was announced. It has since traded uneasily, as they wait to see what comes next.

FEARS ABOUNDING

AsianInvestor has spoken to many professionals across the investment industry about the incoming national security law. Tellingly, almost everybody is afraid to speak frankly.

The national security law is worrisome because it is so broad. The draft legislation stated the new rules would prevent “splittism, subversion, terrorism, any behaviour that gravely threatens national security and foreign interference”. 

That last clause is particularly concerning. China’s leaders hate criticism, can be vindictive and have long memories. And they have repeatedly demonstrated just how far they will go to shut down people saying things they don’t like.

Just this year a Chinese doctor called Li Wenliang was silenced after trying to warn of the initial spread of the coronavirus in Wuhan (he later died of the virus). Beijing has also used a mixture of stick (trade sanctions) and carrots (funds and personal protective equipment) to try to silence other countries’ condemnation for the spread of Covid-19.

This hostility to criticism worries professionals and citizens alike in Hong Kong. They fear China will, with the connivance of local pro-Beijing lawmakers, use ‘national security’ pretexts to undermine freedom of speech and the courts, despite Lam’s claims.

Journalists and regular people alike will begin to wonder how much – if at all – these new rules will allow them to criticise China or even Lam and her pro-Beijing cohort.  

Foreign executives, analysts and economists, meanwhile, may understandably fear that an errant comment could cause their company to be tarred as an agent of ‘foreign interference’ and lose its ability to do business on the mainland.

Even investors wouldn't be immune from such concerns. Fund managers will have to wonder whether they risk running afoul of the new law if they short or sell out of stock positions of major Chinese firms – or whether they are given investment offers they cannot refuse from well-connected mainland businesses.

In other words, truth could erode and corruption flourish.

That would be a tragedy. Hong Kong’s economic strength and culture stems in large part from its character and the knowledge that the rule of law applies. Erode them and entire value of the city begins to decay.

Is the city finished as an international finance hub? Perhaps not. Local financial interests may well still have some sway, and the Chinese Communist Party (CCP) itself is likely to want to retain the city as a useful capital outlet. Those factors could mean Beijing restricts itself to making a severe example of some protesters and quelling the embarrassing demonstrations.

Were that to happen, local and international businesses and investors will likely decide that Hong Kong remains a viable hub, even with a little less freedom.

But that is a best-case scenario. The mounting fear is that China’s overriding priority is to crush local protests, both to prevent them spreading into the mainland and to punish such insubordination. And an erratic US president and a global pandemic could provide useful distractions to do so quickly.

By tightening its grip on Hong Kong, the CCP risks breaking everything that makes the city special, in order to maintain stability on the mainland. It is a cost Beijing appears willing to pay. 

Joe Marsh contributed to this article.