The security law calls into question Hong Kong’s future as a business hub

There’s a new joke in Hong Kong: locals are mocking their city for losing its status as a world capital darling. As they joked, it is the newest UNESCO World Heritage Site.

The tough security law – Article 23 – which came into force at the weekend only renewed the underlying concerns.

Officials say it will protect the city and ensure stability, while critics worry it will silence dissent with its closed trials and life sentences for broadly defined crimes ranging from sedition to treason.

It comes at a time when Beijing’s iron grip and tensions between the US and China are already driving away foreign investors, who now have an “everywhere but China” policy, said Mr Chan, a real estate surveyor who did not want to reveal his full name .

“Hong Kong was considered different from China, so investors could still invest here – not anymore,” he says.

The emphasis on national security and the threat posed by “foreign powers” — a current theme in Beijing’s legislation and recent policies — raises the stakes for foreign capital and businesses operating in the city.

“Business has been terrible for the past two years and there was no big deal at all,” said Mr. Tse, who works for a Chinese state-owned bank. He said his company laid off 10 percent of its staff in June and another 5 percent in the past week alone. “No one knows when their turn will come.”

While it is too early to assess the risks of Article 23 for business, it could lead to higher compliance costs due to its “broad wording” and “severe consequences of a breach”, says Johannes Hack, president of the German Chamber of Trade.

Hong Kong’s government told the BBC in a statement that Article 23 would see the city “progress from stability to prosperity” and would not affect “normal” business. It also said it was “outrageous” to single out Hong Kong when other countries also have security laws.

Hong Kong’s Article 23, which expands national security legislation imposed by China in 2020, comes as the city’s administration tries to reassure the world that it is still a financial dynamo.

The Hong Kong General Chamber of Commerce said it would “make Hong Kong a safer destination for domestic and foreign businesses and professionals operating” in the city, while Hong Kong Chief Executive John Lee dismissed as “ridiculous” the idea that the administration was only interested for national security, calling such concerns a form of “soft resistance.”

Hong Kong’s economy is reeling from Beijing’s crackdown on pro-democracy protests in 2019 and a strict zero-Covid policy. Commercial space rents have fallen, leaving office buildings and storefronts empty. There are fewer tourists – last year’s arrivals were only 60% of those before the pandemic.

The value of the Hang Seng index – the crown jewel of Hong Kong – has fallen more than 40% since 2019. India overtook it in January to become the world’s fourth largest stock market. Singapore has become a tough contender for finance. Global banks are laying off people focused on Hong Kong and China, pointing to sluggish growth and plummeting investor confidence.

An exodus of capital and people followed, with the former head of Morgan Stanley Asia declaring recently in a newspaper column that “Hong Kong is over”. Veteran investor Lam Yat-ming recently wrote in an economic journal that investors should “value their lives and distance themselves from Hong Kong stocks.”

“The outside perception of Hong Kong” has changed, Mr Hak says.

“Although the city is still vastly different from the mainland, the focus on security may increasingly blur the distinction in people’s minds.”

The former British colony has been governed under the principle of “one country, two systems” since returning to China in 1997. Beijing has promised that Hong Kong will enjoy civil liberties for half a century.

But critics say she reneged on the deal, crushing pro-democracy protests and imposing a National Security Law (NSL) in 2020 that saw more than 260 people, including former lawmakers, arrested. Authorities defend it, saying it marks the transition from “chaos to governance.”

The local national security law, outlined in the city’s mini-constitution, was always on the cards. The first attempt in 2003 failed after half a million people took to the streets against it. This time, Article 23 was passed less than two weeks after it was tabled.

Under Xi Jinping, China places “absolute importance” on national security – and Hong Kong’s status as a free society and international gateway comes second, says Kenneth Chan, a political scientist at Hong Kong Baptist University.

He says the arrest of Jimmy Lai, the former media mogul who has been charged under the NSL, is a “wake-up call for the international community”, says Dr Chan.

“National security law has no boundaries. Personal safety, private property rights and individual assets are not guaranteed.”

After police raided Mr Lai’s Apple Daily newspaper in 2021, trading in his company was suspended and it was delisted the following year. The 76-year-old tycoon, who is now on trial, has been behind bars for three years and his HK$500m ($64m; £50m) assets have been frozen.

Hong Kong’s common law system, which underpins the rule of law, has come under scrutiny following the trials of pro-democracy protesters. But the city’s judiciary is seen as independent, at least on commercial matters, although critics worry that Mr. Lee may now choose judges who handle national security cases.

Under these security laws, Hong Kong businesses must adopt additional measures to mitigate political risk – just as they do on the mainland, Dr Chan says.

“Nobody can understand the political direction, so big companies have started hiring political consultants to assess risks and build political connections. All these are new costs leading to less efficiency.”

The city should not be underestimated as an international financial center, says Kevin Tsui, chief economist at research firm Orientis. He adds that Hong Kong should take advantage of its advantages – a simple tax system with low rates and the fact that it is the only Chinese city without currency controls. The Hong Kong dollar is also pegged to the US dollar, which provides financial stability.

“Even if Hong Kong is just a Chinese city, foreigners want to do business with China,” he says.

Still, confidence in the city is shaken, not least because it is also feeling the heat of China’s slowing economy, which has been hit by debt and a property market crisis.

The mainland is the city’s largest trading partner and second largest source of investment. Half of the 2,600 companies listed on the Hong Kong Stock Exchange are from mainland China.

But a new rule introduced by Beijing last year requires Chinese companies to have official approval to list overseas. That made the process much more cumbersome, said a banker, speaking on condition of anonymity.

“We can only wait because we have no idea of ​​the progress. If companies are involved in sensitive industries such as data security or genetic technology, the process will be extremely slow,” he said.

Hong Kong, which has ranked as the world’s number one IPO location for seven of the past 15 years, is now ranked eighth, according to reports.

“Beijing wants private companies to raise funds internationally to save the economy, but at the same time it is worried that these companies will no longer be under control after the listing,” said the banker, who spoke on condition of anonymity.

“They want to control everything, but in the end it will kill the financial market.”

Additional reporting by Grace Tsoi