Beijing's tightening grip on Hong Kong could put region's future as an up-and-coming tech hub in jeopardy

But it is American law, not Chinese, that might make all the difference


Feature When people think about Hong Kong, money usually comes to mind. Over the past two decades, as China beefed up to become the world's second-largest economy, Hong Kong has carved out its role as middleman to the rest of the world.

Today it is widely considered to be one of the most important financial hubs after New York and London.

Hong Kong's prosperity depends on three things. First, its fair courts; second, its independent central bank and financial institutions; and finally, seamless access to international capital. But today, all three came under threat when China's top legislative body, the National People's Congress Stand Committee, passed a new national security law for the former British colony, undermining its autonomy under the "one country, two systems" formula in place since its handover in 1997.

Details of the new law have not yet been released. But guidance from Beijing shows that it will prevent and punish "any conduct that seriously endangers national security", including separatism, subversion of state power, terrorism, and "activities by foreign and overseas forces" that "interfere" in the territory's affairs. Most importantly, Beijing inserted the law directly into Hong Kong's legal code, bypassing the territory's own legislature.

'No longer autonomous'

A preview of the law released two weeks ago gave a peek at what is in store for Hongkongers. According to a reports from state-run Xinhua News Agency, the law will give China's central government jurisdiction over an "extremely small" number of national security cases under "specific circumstances". As was suspected, Beijing state security agencies will be able to operate in Hong Kong for the first time to "safeguard" national security and oversee the law's implementation.

It is believed the legislation will take effect ahead of July 1, the 23rd anniversary of the territory's return to Chinese sovereignty. The organiser of an annual pro-democracy march that drew more than half a million people last year is making a last-minute appeal to hold another rally, despite police warning that such an event could cause a coronavirus outbreak.

Under the law, the language might say mainland China has no territorial jurisdiction on people in Hong Kong, but in practice, we have to watch out

Beijing insists this won't change Hong Kong or threaten its residents. Xie Feng, China's foreign affairs commissioner, said on 25 May that the law was merely designed to plug a legal "loophole" exploited by "a small minority of criminals" bent on harming China.

Local politicians have largely fallen in line. Carrie Lam, Hong Kong's current chief exec, has said that the new laws are doing the business community a favour. The "only purpose" of the law was to "protect Hong Kong and the country". Last year's protests will no longer be tolerated and Hong Kong can go back to doing business as usual, she said.

But some, especially those in the West, fear the laws will have more profound affects. Shortly after China said it would proceed with the law, US Secretary of State Mike Pompeo said that "facts on the ground" demonstrated that Hong Kong is no longer autonomous. As a result, America said on Monday that it would revoke some the territory's special privileges and apply the same trade restrictions to technology to Hong Kong as it does in the mainland.

“With the Chinese Communist Party's imposition of new security measures on Hong Kong, the risk that sensitive US technology will be diverted to the People’s Liberation Army or Ministry of State Security has increased,” US commerce secretary Wilbur Ross said in a statement yesterday. He added that Washington is considering further restrictions.

More worrying than the law itself is how it might be implemented. Hong Kong's pseudo-constitution, the Basic Law, says no arm of the central government can interfere with the administration of Hong Kong's own affairs.

But Beijing has a history of bending the rules when it comes to national security, said Professor Jeanne Huang of the University of Sydney. "Under the law, the language might say mainland China has no territorial jurisdiction on people in Hong Kong, but in practice, we have to watch out."

One well-known example of this strategy at work is the 2015 disappearance of four Hong Kong booksellers accused of selling works critical of Beijing. Rumour had it that they had been kidnapped by secret agents and whisked away to the mainland. Both Hong Kong and Beijing denied the allegations.

Such developments are particularly concerning for companies storing data in Hong Kong. One reason that Hong Kong has become such a financial powerhouse is that, unlike mainland China, it has its own independent data protection authority, explains Professor Graham Greenleaf of the University of New South Wales. Banks, funds, and other financial institutions know what they're getting themselves into and are confident that the data they store in the city is secure.

Backdoor for Beijing?

For this reason, the territory has become something of a data hub in recent years. According to government data, the number of organisations using cloud-based services reached 292,000 in 2019, up 20 per cent from 2017. AWS, Google, Microsoft, Alibaba, and Tencent all have a substantial presence in the city.

What does 'state secrets' mean in Chinese terms? Any sort of information you might think is innocuous might be considered a state secret. The wording is kept intentionally vague and until the specific offences are defined, everyone has a right to be very worried.

But many now worry that the new national security law could give Beijing a backdoor into data stored in Hong Kong. Whereas in the west companies such as Apple have fought high-profile court cases with government agencies seeking to gain access to user data, the Chinese government effectively has no restrictions on what it can access on the mainland.

"China's data privacy laws are essentially made for the private sector – they do not cover their public sector," said Prof Greenleaf. "I don't think anyone has any illusions that the State Security bureau and similar agencies can access pretty much anything they want."

Earlier this month, for example, rumours began spreading on Chinese social media that WeChat and Alipay provided the central government with personal and location data of 350,000 people who had been to Xinfadi wholesale food market during Beijing's recent coronavirus outbreak. Both companies have denied the rumours. But according to the United States-China Economic and Security Review Commission, it wouldn't be surprising [PDF] if the rumours were true.

One point of particular concern, said Greenleaf, is the vagueness of the law's mandate. "What does 'state secrets' mean in Chinese terms? Any sort of information you might think is innocuous might be considered a state secret. The wording is kept intentionally vague and until the specific offences are defined, everyone has a right to be very worried."

Professor Huang said she would be surprised if law ever made it to a judge. Beijing's main goal, she argued, may not be to actually use the law so much as hold it above companies' heads as a warning.

"China is saying 'I have a sword, I may never use my sword – but you know that I have it'," she said. As an example she offers the other special autonomous region in the Pearl River delta, the former Portuguese colony of Macau, which has operated under a similar national security law since 2009. The statute has never needed to be enforced because businesses "self-regulated" by their own accord, she said.

If the bankers go, the tech sector will follow

China's moves, coupled with America's retaliatory sanctions, have spooked the territory's global firms and banks. David Webb, one of Hong Kong's most prominent investors, warned earlier this month that the city was already seeing a "brain drain" as locals flee overseas and international companies find it harder to attract workers. According to the Financial Times, several hedge funds are already exploring plans to uproot their operations in the territory. "Hong Kong as we know it is dead," one financier told the paper. "It will become just another city in China. The hedge fund community will move on to Singapore and elsewhere."

The UK has said last month it will prepare a "pathway to citizenship" for as many as three million Hong Kongers who are eligible to apply for British National (Overseas) passports. Japan is considering drawing up a similar deal.

Maybe some companies will move their regional headquarters to Singapore. But a complete exodus? Not yet, Hong Kong has too much capital flowing through it.

The fear is that if the bankers go, the tech sector will follow suit. Hong Kong was home [PDF] to 129,600 IT workers in 2017, the latest year on record, many of whom do work for the financial services sector. All up for the year, the territory's techies created $145.9bn in value, or 5.7 per cent of GDP, and accounted for almost half of Hong Kong's R&D spend.

News outlets might be spelling the demise of Hong Kong, but locals are wary about jumping the gun. Many say they are waiting for further details about the laws and to see how it is implemented before they start packing their bags. "At the moment it's a case of wait and see," said one tech executive who spoke to The Register on conditions of anonymity. "Of course people are concerned, but we need clarity on what the laws will involve before we can decide anything."

The executive added that he believed the risk of brain drain has been overblown. "Hong Kong's value proposition has not changed. It is still the launchpad for international companies hoping to enter China, and for Chinese companies looking to scale internationally. Some foreign workers may leave in the short term, and maybe some companies will move their regional headquarters to Singapore. But a complete exodus? Not yet, Hong Kong has too much capital flowing through it."

Others warn that America's sanctions are more worrying than the national security law. In treating Hong Kong as part of China proper, Washington's newly minted tech restrictions against the mainland will extend into the territory, said Ben Chang of the Internet Society nonprofit. Such a move makes it more difficult for Hong Kong companies to important American hardware and software, as well as scare American firms off buying kit from Hong Kong, especially in sensitive industries like infosec and infrastructure.

That is a serious concern given Hong Kong's tech-heavy trading relationship with the US. Electrical and telecommunications equipment are America's biggest exports to Hong Kong, accounting for more than half the products it sends to the territory. The US was Hong Kong's largest trading partner after the mainland in 2018, the latest year on record.

All eyes are on the US

Tony Verb, co-founder and director of GreaterBayX, a local tech consultancy, agreed. "There's a significant sentiment on the ground that the US response can hurt Hong Kong more than what China is doing," he said, adding that "a good portion" of the business community saw positive aspects to the new security law. "From a purely business perspective, last year's protests were hugely disruptive and needed to come to an end," he said.

So far, the big businesses on which the tech sector depends don't seem overly spooked. Earlier this month, both HSBC and Standard Chartered, two big names in the territory, endorsed the new law. Nor are there signs of capital flight. Hong Kong's vast deposit base has remained stable and investors are reassured by a $446bn mountain of foreign reserves.

But the territory could be in for a fright if China and the US don't back off. On China's part, that seems unlikely. Mainland firms have slowly become the backbone of Hong Kong's economy, accounting for 73 per cent of the local stock market at the end of last year, compared with 60 per cent five years earlier.

Beijing has grand plans to integrate Hong Kong with Macau and nine southern provinces, including Shenzhen in Guangdong to create a mammoth innovation hub, dubbed the Greater Bay Area, which spans 56,000 square kilometres and 71 million people.

For now, all eyes are on America. When Pompeo told Congress that Hong Kong was no longer autonomous, he set a legal mechanism in motion. The United States-Hong Kong Policy Act of 1992, which was toughened last year, allows Washington to treat Hong Kong as separate from China so long as it is demonstrably independent from the mainland. The Trump administration will now begin discussions on whether it will continue to offer the territory its special trade and other privileges.

Where does that leave Hong Kong? "As long as the rule of law is in place in Hong Kong, it is a very special city – not only in China, but also in the world," said Verb. "The moment that changes, it would lose its differentiating factor as a place to do business. That applies to industries way beyond tech." ®


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