With the arrests of numerous politicians and media outlets, curriculum changes and airport drainage, one could easily assume that Hong Kong is “dying”. The reality is more complex. Even though Hong Kong's civil liberties are restricted, the city retains an important place in the Chinese economy – one that attracts mainland residents, even if some of the existing residents leave the country.
Since 2020, Hong Kong has seen a steady curtailment of civil liberties, marked by the passing of the National Security Law (NSL) last June, which criminalizes treason, secession, and collusion with foreign forces and can be widely used to justify investigations or arrests.
More than a year since the NSL passed, Hong Kong is paying a heavy price for its 2019 protest movement, which lasted more than seven months and resulted in mostly peaceful mass protests and violent clashes between demonstrators and police.
On July 27, the very first trial under national security law ended with the accused guilty of terrorism and secession and then sentenced to nine years in prison for riding a motorcycle on police officers while holding a flag wore with a popular protest slogan. Given that the NSL has been used to criminalize all forms of dissent – including songs, slogans, and children's books – many Hong Kong see the much-lauded autonomy guaranteed through the One Country, Two Systems arrangement through 2047 as effectively over. In fact, they feel that Hong Kong is becoming more "Chinese" and less international with its restricted civil and media freedoms and the rule of law.
To signal its displeasure with this, the United States has launched targeted sanctions against Chinese officials in Hong Kong and even against Carrie Lam, Hong Kong's head of government. Then-USA President Donald Trump also ended preferential economic treatment for Hong Kong in July 2020 and imposed import restrictions on certain technology products from the USA following Beijing's imposition of the national security law.
Following the latest round of US sanctions against Chinese officials in July, Beijing soon retaliated by imposing counter-sanctions against US and non-governmental organizations, including former US Commerce Secretary Wilbur Ross. More importantly, none of these sanctions have slowed the continued crackdown in Hong Kong.
In the past few months, the multi-billion dollar owner of Hong Kong's most openly critical newspaper, Apple Daily, Jimmy Lai, and several of its editors; Dozens of former lawmakers; and numerous councilors were arrested and many were tried. Protest activities are quickly halted and annual events such as the March for Democracy on July 1st and the Tiananmen Square Memorial on June 4th have not been officially approved this year.
However, these arrests reflect the targeted raids that have been carried out on Chinese human rights lawyers, journalists and feminists over the past decade. Beijing's reaction to anything under his rule that openly questions his authority, be it Uyghurs or students, is well known.
While many Hong Kongers and international observers view this as a disaster, this is exactly what Beijing wants, and the hard truth is that the city is still a major financial center.
Hong Kong is functioning in general, especially its major financial sector, with COVID-19 largely under control for the past month with single digit or zero daily cases. Hong Kong's GDP grew an estimated 7.5 percent year-over-year in the second quarter, after rising 7.9 percent year-over-year in the first quarter and ending an 18-month recession due to COVID-19 and the 2019 public protest movement .
For the first half of this year, the Hong Kong stock market saw average daily turnover increase 60 percent to HK $ 187.6 billion (US $ 24.1 billion) compared to the same period last year. Much of this growth was due to an inflow of funds from the mainland, and given the mounting tension between the US and China, that inflow should not just continue but increase. Hong Kong bank deposits rose 5.4 percent in 2020, while FDI into the city rose a whopping 62 percent to $ 119 billion, though that was due to a low base in 2019.
In addition, there were 46 IPOs in Hong Kong in the first half of this year, totaling HK $ 213.2 billion (including HK $ 48 billion on China's video sharing service Kuaishou's HK $ 48 billion listing Technology and JDLogistics' HK $ 23 billion listing.
Hong Kong remains the primary choice for Chinese companies to list outside of the mainland, and some listed in the United States are expected to move their listings to Hong Kong to avoid tighter control of Chinese companies.
Meanwhile, companies like Citigroup and Goldman Sachs are even adding thousands of employees this year, contrary to expectations that companies would downgrade their businesses. Hong Kong-based non-local businesses were down 0.2 percent last June year-over-year. One notable example, however, is wealth management giant Vanguard Group, which is actually leaving Hong Kong for Shanghai to increase its activities in mainland China.
There are also fewer expectations that Hong Kong, as a financial hub, could be replaced by places like Singapore, Tokyo or even Taipei. It is fantastic to expect companies that want to do business with China to move further away, especially to places like Taipei, where it is politically sensitive and restrictive to do business with Beijing.
Hong Kong's greatest asset of being physically adjacent to mainland China and next to the Shenzhen technology hub cannot be emulated by any of its rivals, Singapore in particular.
For many overseas companies operating in Hong Kong, there is some level of concern about the NSL, which extends the authorities' powers to search, seize and freeze the assets of those accused of violating the law. A survey by the American Chamber of Commerce in Hong Kong found that more than 40 percent of those polled, but only 24 percent of the chamber's members, are planning or considering leaving.
However, without a viable alternative to Hong Kong, most international companies are likely to either stay or move some of their business elsewhere. Chinese companies are also the most numerous non-local companies in Hong Kong, with nearly 2,000 companies as of the end of 2020, followed by 1,398 Japanese companies and 1,283 US companies. That doesn't mean more international companies will leave Hong Kong in the future, but for now, Hong Kong's role as China's financial gateway to the world is still intact.
The experience of one of the largest banks in the world, HSBC, is illuminating. It has been forced to bow to Beijing and publicly support NSL, but there is little chance it will pull out of Hong Kong or reduce its activities there, given that up to 90 percent of HSBC's profits come from Asia, particularly Hong Kong , come.
While not many companies are leaving, many are. The NSL has led some Hong Kongers to want to emigrate to more democratic societies. In the first quarter of this year, more than 34,000 Hong Kong residents, 13,700 of whom were already in the country, applied for the British BNO route, a special residence offer for British National (Overseas) passport holders that is only available to Hong Kong residents who were born prior to delivery in 1997. In 2020, Hong Kong's population fell 0.6 percent, the first time since 2003.
But that shouldn't affect Beijing too much. If the pandemic goes away and the borders are reopened, more mainland Chinese will continue to move to Hong Kong, joining the more than 1 million people who already live and work there. Hong Kong authorities have even tried to pressure Hong Kong youths to go to the mainland to work or live, particularly in neighboring Shenzhen. And Hong Kong already experienced exodus in the 1980s and 1990s before the surrender, and many returned to Hong Kong later.
Hectic and crowded Hong Kong has never been a pleasant city for its residents, whether as a financial center, a commercial center, and especially in the post-World War II era when its population more than tripled due to the influx of refugees from mainland China. Its government and business elites have always valued economic rights as political rights. They pride themselves on Hong Kong's consistently high rankings as the freest economy in the world and tingle every time they fall or are removed, for example from this year's Index of Economic Freedom by the Heritage Foundation. Although the loss of civil liberties is a serious problem, many Hong Kong residents are already facing enormous economic struggles, such as astronomical real estate prices.
Although Hong Kong is one of the richest places in Asia with a GDP per capita of more than $ 48,000, it has a poverty rate of more than 21 percent, high inequality, and some of the most expensive and smallest housing in the world. Hong Kong's legislature may be the only one in the world where companies can vote for representatives in multiple functional constituency seats reserved for sectors like commerce, industry, insurance and of course finance.
Integrating Hong Kong with mainland China, which many have been concerned about, has been a goal for some time, as has the Greater Bay Area Plan, which envisions a Silicon Valley-like region, Hong Kong, Macau, and nine major cities in Guangdong Province united, testified. Large infrastructure projects such as the high-speed train from Hong Kong to Shenzhen and Guangzhou and the 54-mile Hong Kong-Zhuhai-Macao Bridge, both opened in 2018, physically continue this integration. Although the Greater Bay Area plan has been mentioned more recently, further integration in the future would not be unexpected.
Constant announcements that Hong Kong is "dying" risk obscuring and simplifying the reality of what is happening there: a deliberate transformation led by Beijing that cares little about the loss of civil liberties while maintaining status the financial city maintains. In other words, old Hong Kong is gone and not coming back anytime soon. This would not be the first time that Hong Kong has received limited attention. Heavy coverage of the 2019 protest movement, which received widespread international support, was followed by far fewer articles examining the consequences or analyzing how the movement was defeated.
There is little evidence that the Hong Kong authorities' crackdown on civil liberties and political figures will ease despite mounting criticism and condemnation and sanctions. It could very well continue in the months ahead as the Hong Kong economy and financial sector continue to pick up.
For the United States and others like the United Kingdom and Japan, the condemnation of the Beijing and Hong Kong authorities must also be weighed against the fact that thousands of companies from these countries operate and thrive in the city and do business with mainland China. There is a clear limit to what the United States can do, despite the fact that the Biden administration issued a warning in mid-July warning US firms of the events in Hong Kong.
Current events require the United States and others to reassess their perception of the city and grasp the extent of the strategic challenges China faces.