On Thursday, China’s rubber-stamp legislature approved a sweeping new national security law for Hong Kong (2,878 to 1), in Beijing’s most egregious power grab yet. The new law essentially crushes the relative autonomy that Hong Kong enjoyed to date, makes a mockery out of the principle of “one country, two systems,” and speeds the city’s path toward a tragic fate.
It also ensures that what made Hong Kong a great place for the West to do business, especially with China, will be lost. The reason China didn’t make such a move before this is because the Chinese Communist Party (CCP) and its companies rely on the city for their economic success and survival, exploiting its relative openness and rule of law to funnel international money into its own coffers and to fuel China’s economic expansion.
Now, Chinese President Xi Jinping and his Politburo colleagues are calculating that they can curtail Hong Kong’s freedoms and still take advantage of its prosperity to bolster their own power. That is precisely what the United States must move to prevent.
Secretary of State Mike Pompeo informed Congress on Wednesday that “Hong Kong is no longer autonomous from China, given facts on the ground.” Any honest analysis must agree. But the precise U.S. response will be decided by President Trump, not Pompeo — and the internal administration debate is already underway.
The smaller options include targeted sanctions on Chinese officials and entities tied to the Hong Kong crackdown or revoking Hong Kong’s exceptions to export restrictions currently applied to mainland China. The drastic options focus on scuttling Hong Kong’s special economic and customs status, which means imposing all the tariffs and regulations that currently apply to the mainland.
Punishing Hong Kong’s economy for Beijing’s actions may seem counterproductive, and there’s no doubt the damage to Hong Kong would be significant. But Hong Kong’s opposition leaders are calling for it anyway because they know how important it is.
“If the U.S. no longer treats Hong Kong as a separate customs territory, will our economy suffer? Of course! . . . Yet the hit is necessary,” tweeted opposition leader Joshua Wong. “For decades, Hong Kong has facilitated the influx of global capital and otherwise unavailable goods (e.g., high-tech products) into China. Leaders in Beijing continue to reap the benefits of this arrangement while our freedoms deteriorate. They can’t have it both ways.”
Beijing uses Hong Kong’s special status as its main tool to attract foreign investment into its own companies, enable outsiders to buy Chinese stocks and bonds, and bring money earned by state-owned firms abroad back into China.
Seventy-three percent of the initial public offerings for mainland Chinese companies took place in Hong Kong between 2010 and 2018, according to the Financial Times. Beijing has been trying to shift its dependence away from Hong Kong to places such as Shanghai for years, but international investors and businesses still preferred Hong Kong because of its relative openness and reliability — until now.
“Hong Kong is the toll road for U.S. dollars and capital into China and their state-owned enterprises,” said Kyle Bass, chief investment officer for Hayman Capital Management. “If we fundamentally alter or sanction that architecture, that is going to hurt China many times more than it’s going to hurt Hong Kong.”
Without Hong Kong to bring Western capital into China, Beijing would have to clean up its own system or raise cash from our markets, something it is increasingly doing anyway. But in our systems, we have the chance to enforce basic rules of transparency, accountability and justice (though we aren’t doing that especially well at the moment).
Removing Hong Kong’s special status would have collateral consequences for U.S. businesses there as well. But it’s likely the only way to get Beijing’s attention and the only way to protect our interests in the longer term. And the risks of doing business in Hong Kong are going up anyway, whether Western businesses acknowledge it or not.
“One reason that they came to Hong Kong is because there was the rule of law there, there was a free-enterprise system, there was a capitalist system. There was democracy and local legislative elections,” national security adviser Robert C. O’Brien said on “Meet the Press” on Sunday. “If all those things go away, I’m not sure how the financial community can stay there.”
Hong Kong leaders are claiming business won’t be affected, but they have no real say anymore. Ultimately, the CCP is the party responsible for what happens in Hong Kong next, because it made the decision to throw the current system into disarray, for its own political purposes.
Beijing wants to keep the benefits it reaps from Hong Kong’s status as a free and independent place while taking away those very freedoms. This is our opportunity to make China understand it can’t do both.