New national security law all but ends the city’s autonomy

HONG KONG — The last days of May were just another weekend in downtown Hong Kong. Alan, a 20-year-old university student, helped to build barricades from trash cans and bricks dug up from pedestrian streets nearby. He was calm as he used a pair of binoculars to monitor the waiting riot police, alerting the crowd with improvised hand signals as the line advanced. As clouds of tear gas swirled, the black-clad protesters retreated, chanting, “Free Hong Kong!”

“It’s a bit deja vu, really,” he said. Alan has joined the protests almost every week since they began last summer, stopping only when the COVID-19 outbreak cleared the streets.

But this time is different. When hundreds of thousands of people came out onto the streets last year to protest a proposed law that would have allowed criminal suspects to be shipped from Hong Kong to the mainland, it felt like the beginning of something. The streets of the city became a battleground as a democratic movement stood up for its freedoms, the struggle beamed live around the world. Today’s protests feel like a last stand.

In May, faced with the open defiance of Hong Kong’s protesters, Beijing decided to bypass Hong Kong’s quasi-independent legislature and impose a new national security law that would give the mainland the power to clamp down on dissent. Although China said the protocols only target “a small minority of criminals” who involve in activities pertaining to “separatism, subversion, terrorism and foreign interference,” critics believe the law, in effect, ends Hong Kong’s freedoms of speech and assembly — and with it, the city’s unique status.

“I can’t imagine living under the shadow of secret police,” Alan said. “It feels like the last firewall guarding our freedoms is about to collapse.”

Protesters in a stand-off at the Chinese University of Hong Kong in November 2019: “This is the saddest period of Hong Kong. I cannot express the sense of despair in words,” said pro-democracy lawmaker Dennis Kwok.    © Reuters

The law, which will also allow the mainland’s security apparatus to operate in Hong Kong, sent an immediate chill through the city. People rushed to download virtual private networks to hide their digital footprints. NordVPN, a popular provider, said it handled 120 times more downloads the day after Beijing’s announcement than the day before. Google searches for emigration spiked, reaching the highest popularity reading of 100, according to Google Trends.

It also shook the business community. The day after Beijing announced the proposed law — which was subsequently passed by the Chinese National People’s Congress on May 28 — Hong Kong stocks fell 5% in their steepest single-day drop in five years, and continued their decline into the following week. Local and global businesses fear that autocratic control from Beijing will undermine the foundations of Hong Kong’s economic success — its relative freedom and openness, its rule of law and the special status that it enjoys with the U.S., which allows it to act as a conduit for capital to flow between the world’s two largest economies.

“It is pretty much one country, one system … it’s, in effect, breaking down completely the two systems that were guaranteed to Hong Kong people,” said pro-democracy lawmaker Dennis Kwok. “This is the saddest period of Hong Kong. I cannot express the sense of despair in words.”

The core to success

A month before the security bill was introduced, James Tien, a property tycoon and the honorary chairman of the city’s pro-Beijing Liberal Party, spoke with the Nikkei Asian Review from his office overlooking the financial center, a grove of glass skyscrapers embellished with the brands of global companies, where Bank of China has stood in harmony with JPMorgan for decades.

Tien is a symbolic figure of old Hong Kong. As the scion of a manufacturing dynasty, he moved into politics in the late 1980s under the colonial-era Legislative Council. When he sat on the consultative committee of the Basic Law — the group that advised on the de facto constitution of Hong Kong — he vowed to uphold Hong Kong’s way of life.

“That’s why it’s stipulated that we can enjoy the freedom of speech, the freedom of press and the freedom of assembly. … We keep things that are core to Hong Kong’s success,” he said.

Carrie Lam is sworn in as Hong Kong chief executive in 2017 alongside Chinese President Xi Jinping.   © Reuters

That core has been under attack from Beijing since President Xi Jinping took office in 2013. Crackdowns on dissent have intensified calls for democratic reform have been denied and Beijing’s organs have been increasingly vocal on Hong Kong issues — all deemed as breaches to the “one country, two systems” arrangement under which Hong Kong is guaranteed a high degree of autonomy and democratic freedoms.

“At the very beginning, [autonomy] worked out pretty well for both mainland China and Hong Kong. But as China’s economy thrives, Hong Kong’s importance is diminishing. Inevitably, it’s more and more difficult to defend Hong Kong values,” Tien said. “It’s best that we return to the old normal, the 1997 version of one country, two systems. But people call me naive when I say so. Maybe I really am.”

Hong Kong’s tycoons have been used to wielding political influence and being consulted on major decisions. Even within the Beijing loyalist camp, there was room for dissent.

In 2003, Tien stood against his own colleagues in the legislature to oppose a controversial law, Article 23, a precursor of 2020’s national security legislation, which would have criminalized acts of treason and sedition. The government shelved the bill before it went to a vote.

“Back then I didn’t think I was a betrayer. If I’m working for a company, I have the responsibility to warn the management of bad policies,” he said. “If a certain extent of oppositional voice is allowed, we can better maintain social harmony.”

That space has closed. There is “very little room” for pro-establishment lawmakers to maneuver these days, Tien said, as they are expected to take orders directly from Beijing.

The chill that spread in front of the new security law has made dissent all but impossible. In the days that followed its announcement, corporate executives turned down interview requests and financial institutions made only oblique references to the new measures. In an investment strategy note published on May 25, Goldman Sachs said it favors “externally focused themes amid increased domestic uncertainty,” while taking “no view on the national security law itself.”

Contacted after the new national security law was announced, the usually outspoken Tien said he “does not want to comment on the issue.”

The law could criminalize dissent against the party line, bringing Hong Kong’s civil society and media in line with the mainland, where freedom of speech is often denied under ordinances that prohibit “subverting the state.”

At their peak, the anti-extradition bill protests saw almost two million Hong Kongers take to the streets.    © Reuters

The loss of its freedoms will resonate beyond the media and the activists taking to the streets. Hong Kong is a city of global capital. Its international residents — 5% of the population — are a cacophonous mix of bankers, journalists, diplomats, think-tankers, shipping executives, traders and property investors. Alongside them are the ultrawealthy and their attendants — private bankers, domestic helpers, wealth managers, auctioneers and divorce lawyers — for whom the city has had a perfect blend of proximity to China and the individual liberties of the West. This unique status made it the de facto financial center of Asia, running money from India to Japan.

Whether that business continues to thrive depends on whether companies and individuals who established themselves in Hong Kong will still be comfortable operating in a city that is indistinguishable from the mainland.

“Will it mean limiting online, press and personal freedoms? People may also ask whether Beijing’s concern over foreign interference adds an element of risk to foreigners living here,” Tara Joseph, the president of the American Chamber of Commerce in Hong Kong, said in a statement.

Even before the national security law was proposed, money managers were edging away from Hong Kong, spooked by a year of escalating confrontations on the streets and in the legislature. Last year, the Monetary Authority of Singapore received about 200 applications from fund managers seeking authorization, up from 180 the year before, according to reports in the Financial Times. Asset managers including Raffles Family Office, Pinpoint Asset Management, Myriad Asset and Nine Masts Capital have set up additional offices in Singapore recently.

“HSBC betrayal:” Riot police stand outside a vandalized HSBC branch in Hong Kong on Jan. 1.   © AP

Asia’s private wealth, which has been primarily managed out of Hong Kong for decades, is also looking for alternatives. As of the end of 2018, the city’s assets under management amounted to 7.6 trillion Hong Kong dollars ($980 billion), according to KPMG.

“For most rich families, the inheritance of assets is their most important consideration. They think 20 to 30 years ahead, and Hong Kong has too many uncertainties in the long run,” one wealth management director in Hong Kong told Nikkei. “If the local unrest continues and Beijing starts to micromanage the city, many investors fear Hong Kong would just become another Shanghai.”

If that happens, and “one country, two systems” ceases to operate, it will not just be Hong Kong that suffers. The U.S. government has given Hong Kong special treatment in trade and investment since its handover from the U.K to China in 1997. That arrangement has allowed capital to flow between the Chinese mainland and the U.S., providing both with access to the other’s money and markets, even as their political relationship has waxed and waned.

In November, U.S. President Donald Trump signed into law the Hong Kong Human Rights and Democracy Act, which requires the State Department to report to Congress at least once a year on whether Hong Kong has retained the high degree of autonomy promised by Beijing.

Speaking in April, Brian Fong, a scholar of Hong Kong studies at The Education University of Hong Kong and the founder of Network DIPLO, a citizen diplomacy network, told Nikkei that actually ending Hong Kong’s special status would be “the nuclear option.” Instead, the act was a way to apply pressure on Beijing. “Washington sees the strategic value of Hong Kong amid U.S.-China tension, as it is where China raises most foreign capital,” Fong said.

Data from CEIC shows that in 2018, money flowing through Hong Kong accounted for more than 60% of foreign direct investment into China.

Days after the national security law was announced, U.S. Secretary of State Mike Pompeo said that he no longer believed Hong Kong warranted its special status. “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground,” he said in a statement.

Analysts said this might mean the U.S. will apply the same import tariffs on goods imported from Hong Kong that it does from the mainland, and may restrict exports of high-technology products to the territory. It is likely to limit Chinese companies’ ability to raise capital, as many have used the city-state to access international markets and avoid restrictions on the mainland.

“[China] needs access to a capital market. … It is evident that Shanghai and Shenzhen are not ready to be credible international financial centers,” Louis-Vincent Gave of Gavekal Capital wrote in a note to clients. “It wants to preserve the territory’s financial and commercial functions, as there is no easy replacement for them. This is a narrow path to walk.”

Deep divisions

A landscape of raging fires, broken glass and brick debris would have been unimaginable in Hong Kong a year ago, but over the second half of 2019 they became a daily reality. As peaceful protests turned into running battles, many in the city’s business community despaired, not just at the violence and disruption, but at the government’s inability to bridge the ever-growing divides. State institutions that were once considered among the strongest in the world seemed to be succumbing to politicization and decay.

The increasingly desperate actions of the protesters on the streets were met with a striking reluctance to compromise by the authorities. The government refused to withdraw the extradition bill after a million people took to the streets to demand it, and only did so after months of violence. This has entrenched a belief among many citizens that Hong Kong’s institutions no longer see themselves as accountable to the people.

The fracture has been particularly visible within the criminal justice system. About 9,000 people, aged 11 to 84, have been arrested since the onset of the protests. Police officers, who have been accused of using excessive force when clamping down on protests, are still free from legally binding investigations.

“At this point in time, I would say there is still rule of law in Hong Kong, but the problem is we don’t know how long it can be kept,” said Jason Ng, convener of the Progressive Lawyers Group, an advocacy group formed by law professionals. In April, a court case drew ire from the public after the judge expressed sympathy for a man who stabbed three people in front of a pro-democracy message board because the defendant’s income was affected by the social movement.

Ng said individual cases like this, albeit rare, can erode public trust in courts. “With more protest-related hearings scheduled for the next few months and more decisions ruled against them, I’m afraid more people might lose faith in the judiciary,” Ng said.

Confidence in the rule of law has underpinned Hong Kong’s financial and professional services sectors, which account for 30% of its gross domestic product.

In January, Moody’s Investors Service downgraded Hong Kong’s sovereign credit rating, citing the government’s inability to handle the crisis. “The downgrade principally reflects Moody’s view that Hong Kong’s institutions and governance strength is lower than previously estimated,” the rating agency said in a statement.

“Business confidence lies in stability and the sense of security, which is held up by an intact court system and an accountable government,” Ng said. “If the trust in institutions is lost, Hong Kong will be left with little strength.”

The COVID-19 pandemic offered the embattled government a rare opportunity to reshape the public discourse and to unite the city around a common enemy. A public health emergency could have been a chance to show the strength of the city’s institutions and restore some measure of faith.

Bernard Chan, the government’s top advisor and the chairman of local insurer Asia Insurance, told Nikkei that this should remind people of the economic costs of protests. “Now people can decide, whether they still want to see fire on the streets again,” he said — speaking before the national security law was announced. “It’s time for us to unify and save Hong Kong’s economy.

However, Chan, who has served as a government advisor for more than a decade, acknowledged that the protests are bound to flare up again. “The reason is obvious… all the underlying problems unsolved last year still exist,” he said. Some of those problems — inequality and the high cost of living — are likely to be exacerbated by an impending economic shock, as the COVID-19 pandemic pushes Hong Kong deeper into recession.

There are also signs that the divisions have solidified, splitting society and the economy into two distinct camps. Today, “yellow” and “blue” businesses serve supporters of the protests and the police, respectively.

Hay, an investment banker in his 20s, is among the scores of Hong Kong young professionals who stood on the barricades. “People around me only cared about making money, but now many realized that we can’t divorce politics from other aspects of life. There’s no more business as usual if our basic freedoms are being taken away,” he said, while waiting in line for a coffee at a “yellow cafe.”

He is now planning to launch an online platform that connects protester-friendly employers in the finance industry with pro-democracy job seekers, who often fear their political stance might affect their prospects when hunting for jobs in an industry where Chinese capital is of huge significance.

Both Beijing and the Hong Kong government have been promoting the national security law as the only solution to “restore peace and order.” “The violent protests have severely damaged Hong Kong’s reputation as a safe business hub. Many foreign investors are worried,” commerce secretary Edward Yau told Nikkei. “We need to take immediate steps to bring calm to our city.”

Several of Hong Kong’s most prominent tycoons, including Li Ka-shing, the founder of one of Asia’s largest conglomerates CK Hutchison, have voiced their support for the security legislation. Li said the passage of the security law could “relax the central government’s worry against Hong Kong and bring into play positive affect to long-term, stable development.”

Demonstrators burn the White Paper, the proposed law after Hong Kong’s handover, outside a government building in 1991.   © Getty Images

With the anniversary of the first mass protests approaching and Legislative Council elections due in September, stability and unity seem further away than ever. Alive to the feeling on the streets, pro-democracy lawmakers told Nikkei that they are considering abandoning their long-term policy of conciliation with the government.

“We used to believe that by engaging and discussing with the government, we could find a way out,” said Lo Kin-hei, the vice-chairperson of Hong Kong’s largest pro-democracy party, the Democratic Party. “But now it’s clear that the government has shut all doors.”

The protesters are also gearing up for another summer of confrontation. People turned out in force in late May to demonstrate against a new bill that would criminalize disrespecting the Chinese national anthem.

A recent survey of 370,000 people by Citizens’ Press Conference, a self-organized protest platform, found that 85% of protesters intend to defy the national security bill and take to the streets anyway.

“Many of us have already prepared for the worst. We might get arrested anytime and spend 10 years in jail,” said Alan, referring to the maximum sentence of a rioting charge. “I’m afraid, of course. I want a peaceful life too. But when there’s no way things can work out within the system, what other options do we have?”

Some even said that they see Beijing’s intervention as a sign that they are winning.

“[The Communist Party] would not have ever taken such a drastic step if it didn’t fear it was losing control of Hong Kong,” said Kong Tsung-gan, an activist and writer who has chronicled the pro-democracy movement from the beginning. “Ironically, this is a sign of our success. Any time you stand up to the Party, you have to be ready for the furious response. This is it. … The question it poses is: Are we willing to sacrifice and suffer much more than we have up to now? If we are not, then surely we are doomed.”

Additional reporting by Narayanan Somasundaram, Kenji Kawase and Stella Wong.

Article originally appeared in Nikkei on June 3 2020