China Circles Wagons on Sanctions over HK Security Law

Grandiose plans include shifting financial operations to island province

Beijing is seeking to preempt the effect of retaliatory measures that the United States and western allies are bringing for the draconian national security law being forced onto Hong Kong including a bizarre and probably unworkable plan to develop the island of Hainan (above) as an entirely new financial center as a backup for the beleaguered territory.

In the meantime, thousands of multinationals headquartered in the city are trying to figure out what to do over the effects of the retaliatory measures.

On June 1, the Chinese government released a master plan for what it described as the Hainan free trade zone, with the purported aim of building the southern Chinese island into “a globally-influential high-level free trade port” by 2050. This is only three years after Hong Kong’s “one country, two systems” expires in 2047. The Chinese government’s plan for Hainan includes a financial market.

What practical effect this will have is debatable. China has been attempting to rebuild Shanghai into the financial center it once was prior to the arrival of the Communists in 1949, but so far it hasn’t been able to dent Hong Kong’s preeminence, an indication that the apparatchiks, decades later, haven’t been able to figure out the multinational requirements for a rules-based judicial system, the sanctity of contract and a generally-observed system of laws.

The national security legislation, which is designed to criminalize Hong Kong citizens for advocating the city’s independence, “colluding with foreign forces,” and for advocating what Beijing regards as subversion and terrorism,  was ratified by China’s rubber-stamp parliament, the National People’s Congress, on May 28 and is expected to come into force in Hong Kong in a few months.  

The decision to override Hong Kong’s Basic Law, agreed between the United Kingdom and Beijing prior to the handover of the former colony in 1997, has generated deep concern ad criticism of China across the planet, with all member states of the so-called “Five Eyes” intelligence alliance, comprising the US, UK, Australia, New Zealand and Canada, criticizing the security law for eroding Hong Kong’s autonomy. At least three members -- the US, UK and Canada – have taken action against China for this or warned of doing so. The Five Eyes, one of the most comprehensive intelligence alliances in the world, partners Japan, Germany, and France in spying on China and Russia.

On June 3, Dominic Raab, the British First Secretary of State, tweeted that he and Japanese Foreign Minister Toshimitsu Motegi “discussed the situation in Hong Kong and the importance of protecting their high degree of autonomy.” On June 2, Raab tweeted that he has spoken to French Foreign Minister Jean-Yves Le Drian on Hong Kong and other foreign policy issues.

Also on June 2, US Secretary of State Michael Pompeo tweeted that he had a “great conversation” with his counterparts from the other Five Eyes nations, namely the UK, Australia, New Zealand, and Canada. Pompeo added, “Together we are addressing the CCP’s (Chinese Communist Party’s) erosion of Hong Kong’s autonomy and pushing for transparency on Covid-19.”

On June 1, the Canadian government said in a press release that Canadian Foreign Minister François-Philippe Champagne spoke with his counterparts from Australia, New Zealand, the UK and US. The ministers discussed the COVID-19 pandemic and the situation in Hong Kong, an issue of “shared concern,” said the press release.

Champagne said Canada is “actively reviewing” a wide range of special trade and commercial considerations between Canada and Hong Kong, reported the Star, a Canadian newspaper, on June 2.

In columns published in several newspapers on June 3, UK Prime Minister Boris Johnson said more Hong Kong people will be allowed to stay in the UK for extended periods if China pushes ahead with the security law.

On May 29, US President Donald Trump issued a proclamation that limits the People’s Liberation Army’s ability to use non-immigrant student and researcher visas to acquire US technology and intellectual property. 

With the security law, Hong Kong is no longer sufficiently autonomous to warrant the special treatment which it enjoyed from the US, Trump declared at the White House on May 29. “China has replaced its promised formula of “one country, two systems” with “one country, one system.” Therefore, I am directing my administration to begin the process of eliminating policy exemptions that give Hong Kong different and special treatment.”

Trump’s announcement would affect the full range of agreements which the US has with Hong Kong, with few exceptions, including US export controls on certain technologies. The US will revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China, he added. The US will also sanction Chinese and Hong Kong officials “directly or indirectly involved in eroding Hong Kong’s autonomy” and “absolutely smothering Hong Kong’s freedom,” Trump said. “Our actions will be strong. Our actions will be meaningful.”

The US government is trying to restrict the flow of advanced technology to China through various channels including Hong Kong, said Richard Bush, a non-resident fellow at the John L Thornton China Center in a podcast on June 1 by the Brookings Institution, a US think Tank.

“Such restrictive policies could create, at least for a while, a kind of climate of fear and a sense that in Hong Kong that the US was trying to punish it,” said Bush.

International companies worried

According to a survey by the American Chamber of Commerce in Hong Kong, 53.3 percent are “very concerned” about the security law, while another 30 percent are “moderately concerned.” The survey, which was released on June 3, found 60 percent believed the security law will harm their business operations in Hong Kong.

The chamber polled 180 of its members, of which two-thirds were representatives of US companies while one third represented Hong Kong companies and companies of other nationalities.

Currently, 29.4 percent are considering relocating some of their assets or capital or operations out of Hong Kong, while 70.6 percent have no plans to do so. Among the individuals who were polled, 37.8 percent are considering leaving Hong Kong while 62.2 percent are not.

So far, 66.1 percent have no contingency plans in anticipation of the security law and escalating US-China tension, according to the survey.

Hainan

Thus the Chinese government’s contingency plan to develop Hainan into an alternative free trade zone as the US squeezes Hong Kong, the only international financial window on China. Hainan is expected to be given more autonomy in reform, partly like Hong Kong’s “one country, two systems,” and encouraged to make its laws more flexible. Hainan’s regulations will align with international norms, according to the state plan.

An article in Chinese state news agency Xinhua on June 2 hinted that US pressure was behind the Chinese government’s decision to develop the Hainan free trade zone. The article said the central committee of the Chinese Communist Party noted protectionism and unilateralism were on the rise, while economic globalization is facing greater headwinds.

Hong Kong was likely on Beijing’s mind, since Deputy Prime Minister Han Zheng, the top Chinese official in charge of Hong Kong, announced the plan for Hainan and heads the group in charge of liberalizing Hainan.

Although Hainan will be developed into a new financial center, it won’t replace Hong Kong as an international financial hub, wrote Liang Haiming, dean of the Hainan University Belt and Road Research Institute, in the Global Times, a Chinese state-owned newspaper, on June 2.

Hong Kong’s advantages include free capital convertibility as well as a sound shorting and hedging mechanism, which suits short-term returns on capital, Liang explained. In contrast, the financial market that will develop in Hainan will be a better choice for foreign investors who want to expand in mainland China in the long term, Liang said. Foreign investors could undertake different kinds of investments in Hong Kong and Hainan, like buying fixed-income products in Hong Kong and launching high-tech ventures in Hainan, Liang added.

Liang likened Hong Kong and Hainan to two UK financial centers, London and Edinburgh, respectively.