Hong Kong’s legal and political landscape has changed dramatically since the actions of the Umbrella Movement demonstrators in 2014, most notably with the introduction of a national security law (NSL) in July 2020. In recent weeks and months, the legal and political landscape in Hong Kong has undergone a rapid transformation, one that has taken many observers by surprise. This transformation gained momentum at the end of March 2021 when China’s National People’s Congress Standing Committee unanimously approved Hong Kong electoral reforms (Hong Kong Free Press, 2021a). These reforms amend the first and second annexes of Hong Kong’s constitution, the Basic Law, and thus allow for changes to the city’s electoral process.
Other recent concerning developments alongside this substantial alteration to the city’s electoral system include: large scale trials and prosecutions of pro-democracy activists under the NSL (BBC News, 2021), a reduction in media and academic freedom (Transparency International, 2021) and the banning, for the second year in a row, of the annual Tiananmen Square massacre vigil (South China Morning Post, 2021). These developments are having, and will continue to have, a direct impact on businesses operating in Hong Kong, both foreign and domestic.
The changes to Hong Kong, and thus by extension to the business operating environment there, should be seen through the lens of an accelerated pulling of Hong Kong into Beijing's orbit. This assimilation has always been inevitable, but developments since the passing of the NSL have shown accelerated efforts to marginalise political opposition, indoctrinate a form of patriotism and dilute a traditionally independent judicial system.
This unanticipated speed of change to the city is something foreign governments and businesses have to react to. Whether businesses, and indeed locals, choose to stay the course, leave the city, or find a balance in between, is a decision many will most likely have to make much sooner than planned. Businesses must now speed up their plans for scenario-planning in a much more rapidly changing political risk landscape. Relocation of people or business to other countries in regions that have a more stable legal environment, such as Singapore, is an increasing possibility.
China is aggressively limiting pro-democracy positions in Hong Kong, redefining the governmental requirement of “patriotism” (The Guardian, 2021). The Chinese Communist Party (CCP) has redefined “patriotism” to mean required support for the People’s Republic.
This development is significant as it leaves foreign companies in a difficult position because they are unlikely to identify with this CCP-sponsored definition of “patriotism” that local employees will be forced to accept. This creates the challenging situation within multinational companies where, whilst Hong Kong employees will be forced to adhere to the values and statements made by the CCP and Hong Kong government, foreign firms and their expatriate employees may not. The implications for Human Resources and Public Relations departments could be numerous. Foreign companies doing business in - or with - Hong Kong may also face reputational risks and increasing pressure from democratic countries. Such risks and pressures arise as a result of businesses needing to meet their local obligations to legal decisions viewed as superseding pre-existing Hong Kong laws, and against the wider interest of many of the territory’s residents. These pressures can be expected to intensify once pro-democracy politicians and activists face trial later this year on subversion and other charges under China’s imposed NSL.
The impact of the NSL has been widespread and impactful. In April 2021, Hong Kong’s Secretary of Security John Lee revealed that since the NSL came into force in July 2020, 100 people have been arrested and 57 charged (The Standard, 2021a). He also spoke about how the law had made the city return to normality. The significant erosion of democratic freedoms that were present in Hong Kong until recent years can notably be seen by the April 2021 recommendation by former Democratic Party leader, Emily Lau, who cautioned against pro-democracy parties deciding to run in legislative elections planned for later this year (The Standard, 2021b). Lau claims the elections are no longer free and fair, and are thus not worth standing in. This opinion comes in light of the considerable recent changes to Hong Kong’s electoral system.
Respect for the rule of law and an independent judiciary has been one of the elements of Hong Kong’s political system most prized in recent years, as an antidote to other worrying erosions of freedom in the city. But the NSL has also called the judiciary into question. Recent trial verdicts have raised concerns about the independence of the judiciary, rule of law and the increasing hybridisation of the city’s Common Law system (Al Jazeera, 2021). Verdicts highlight how elements of the NSL have supplanted aspects of Hong Kong’s Common Law-based legal system and raise concerns about the respect of the rule of law. For example, the NSL places the onus on defendants, rather than the prosecution, to prove that they will not be a security risk or a threat to the government if released on bail. Such developments are significant and should be followed very closely. These developments leave expatriates and foreign businesses in the city vulnerable to unwanted scrutiny or retaliation, and uneven or concerning interpretations of the law.
On Thursday, April 1, Hong Kong media mogul Jimmy Lai and “father of democracy” Martin Lee, along with seven of Hong Kong’s most prominent pro-democracy activists, were convicted on unlawful assembly charges carried out during the 2019 protests (New York Times, 2021). The judge acknowledged that the demonstrations were peaceful, but accepted the prosecution’s argument that freedom of assembly was not “absolute” in Hong Kong. This ruling calls the right of freedom of assembly into question for the people of Hong Kong, and should be kept in mind by any individuals or corporations who support freedom of assembly publicly.
The media and judiciary coming under fire is a development that has not gone unnoticed in the international community. In March 2021, the Heritage Foundation, a U.S. think tank, removed Hong Kong from its economic freedom ranking, underlining growing concerns over Beijing’s tightening grip on the Asian financial centre after its introduction of the NSL (The Heritage Foundation, 2021). Also throughout March, the U.S. imposed sanctions on Chinese and Hong Kong officials for their recent announcements regarding Hong Kong (The Diplomat, 2021). It remains to be seen whether sanctions will be effective, or if they will simply damage Hong Kongers and add fuel to Beijing’s narrative that everything happening in Hong Kong has been orchestrated by foreign powers.
Although protests have been rare for many months, this was a result of the pandemic rather than any reduction in public anger and fear about developments in the city. Large gatherings are also more often than not forbidden because of the NSL, which means that any law enforcement response to future protests of a peaceful or violent nature is likely to be violent, with high chances of escalation. In recent weeks, a number of high profile trials relating to the 2019 protests have concluded, with judges ruling that protesters - indeed peaceful ones - were guilty as freedom of assembly is “no longer absolute” in Hong Kong.
Western companies with close ties to Hong Kong may also face increasing pressure from their home countries to support peaceful democratic action. This will likely place them and their staff in complex, and often irreconcilable, positions with regard to the local and central governments in the short-term and beyond. The Hong Kong government now has the NSL as a powerful deterrent against any further unrest, as well as recently announced reforms that will further restrict people’s democratic freedoms. The NSL has allowed the government to both prevent unrest and to increase its grip on power.
Another important development for business leaders to consider is the Hong Kong government’s increased emphasis on the perceived threat posed by unidentified external forces. The government has pushed a rhetoric that frames Western countries as having unjustly meddled in Hong Kong affairs - something they term ‘foreign interference’ - as well as foreign media having been guilty of spreading fake news about developments in Hong Kong (Reuters, 2021; Hong Kong Free Press, 2021b).
Just as Western governments have accused countries such as Russia and China of being responsible for foreign interference, the Chinese government portrays western actions and speaking out in support of Hong Kong as the very same thing. Beijing has not offered any definition as to what it means by ‘foreign interference’, nor is it likely to do so. Following the announced electoral reform changes, as well as the more prominent trial verdicts, Western governments immediately began speaking out, with the U.S., U.K. and E.U. governments all releasing statements expressing concern and disagreement with events unfolding in Hong Kong. These two opposing dynamics leave international companies vulnerable to pressure from the local and central administrations as they seek to conform to laws and opaque norms that are likely to be opposed by their home governments.
Hong Kong’s media landscape has also suffered. The assimilation of Hong Kong back into China has always been inevitable, but developments since the passing of the NSL have shown accelerated efforts to marginalize the political opposition, impose a form of censorship on public opinion and expression, and dilute a traditionally independent media landscape. Journalists and newspaper headquarters have been attacked (International Federation of Journalists, 2021), prominent journalists have been prosecuted and jailed (Channel News Asia, 2021) and the city’s state broadcaster has resorted to increasingly impartial reporting (Voice of America, 2021). Public trust in the media is at a record low (Hong Kong Free Press, 2021c). Foreign and domestic businesses operating in the media sector will need to take extra care in the future, treading carefully in this new normal.
These political developments, and resulting changes to the business risk landscape, should be seen in light of the economic strain placed on the city by the COVID-19 pandemic and an economy that was already struggling following almost a year of on and off violent demonstrations during 2019 that damaged local businesses, affected tourism and reduced foreign direct investment. Compare this to China’s impressive economic recovery since they experienced the worst of COVID-19, and it becomes apparent that the tables have really turned. Where 25 years ago Hong Kong was the economic powerhouse and China the backwater, this may be in the process of reversing.
Despite all the developments outlined above, many businesses are deciding to stay put. Indeed, some are even expanding their operations in Hong Kong. For example, in April 2021, HSBC revealed that a number of its top executives currently based in London would be relocated to Hong Kong (The Wall Street Journal, 2021). This will be done for the main reason that the bank wants to increase their focus on Asia. The move comes despite increasing levels of political and business risk posed by Hong Kong.
However the May publication of an annual survey by the U.S. Chamber of Commerce revealed that 42 percent of their members were considering leaving Hong Kong (Barrons, 2021). Sixty percent cited the National Security Law as a reason for this exit. Increasing anti-foreigner sentiment in the media and feared declines in educational quality as a result of reducing media freedom were other concerns mentioned. In addition, another recent survey revealed the very real risk of brain drain in the future, as the young workforce depart Hong Kong for less oppressive countries. In the poll, 60 percent of young Hong Kongers said they were considering leaving Hong Kong in the future (Business Insider, 2021). The potential risks of brain drain and the impact on Hong Kong’s human capital for future foreign investors are significant. Although much of the future remains ambiguous, the level of business risk that businesses operating in Hong Kong are exposed to has increased markedly, more so than many other places in the world.
References:
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Barrons., 2021. US Business Group Warns 42 Percent Of Members Plan Hong Kong Exit. Available at: <https://www.barrons.com/news/us-business-group-warns-42-percent-of-members-plan-hong-kong-exit-01620800414> [Accessed 17 May 2021].
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