Hong Kong’s business hub status imperiled by security law

Potential repercussions from the proposed national security law range from loss of business for Hong Kong’s financial markets to travel restrictions on its residents. (Reuters)
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Updated 28 May 2020

Hong Kong’s business hub status imperiled by security law

  • Chinese government has not given details of the law
  • Legislation aimed at suppressing secessionist and subversive activity

HONG KONG: A national security law proposed by China could imperil Hong Kong’s status as one of the world’s best places to do business.
The law, approved Thursday in Beijing, led Secretary of State Mike Pompeo to say Washington will no longer treat Hong Kong, already reeling from anti-government protests and the pandemic, as autonomous from Beijing.
The Chinese government has not given details of the law, which is aimed at suppressing secessionist and subversive activity in the former British colony.
After 11 months of protests, Chinese leaders say it’s needed to combat unspecified threats in the semi-autonomous region of 7 million people. But business groups, lawyers and financial analysts say potential repercussions range from loss of business for Hong Kong’s financial markets and law firms to travel restrictions on its residents.
Hong Kong is highly regarded for its skilled workforce, business-friendly legal system, Western-style free speech and ease of movement. But global companies already were shifting some operations out of Hong Kong due to rising costs and uncertainty after prolonged, sometimes violent clashes between police and pro-democracy protesters.
Scott Salandy-Defour, founder of clean-tech startup Liquidstar, has been considering moving out of Hong Kong, and the security bill is the “last straw,” he said. “I don’t see how it gets any better from here.”
“When we say we’re a Hong Kong-based company when talking to investors, it’s just not as attractive as it was as a year ago,” said Salandy-Defour, whose company provides sustainable battery rental and charging services for developing countries.
“We’re potentially cutting ourselves off from a lot of different funding avenues, like grants from the US government,” he said.
Hong Kong’s leader Carrie Lam has tried to reassure companies and the public that its civil liberties won’t be affected. But the law shows Chinese President Xi Jinping is determined to tighten control.
“Hong Kong is riskier than it used to be,” said Tara Joseph, president of AmCham Hong Kong. “There is a big worry that there are two buses careening toward each other, and that’s the US and China, and that this could have a profound impact in Hong Kong,” Joseph said.
Critics say the law undermines the “high degree of autonomy” promised when Britain handed control to China in 1997. That autonomy meant Washington and other governments have treated the city as a separate territory for trade, travel and other affairs.
Secretary of State Mike Pompeo said Wednesday those changes are significant enough that Washington will no longer treat Hong Kong as autonomous.
The loss of Hong Kong’s trade privileges could mean Hong Kong identity card holders might lose their ability to visit the United States without applying for a visa in advance. Washington also could revoke its promise to exchange Hong Kong dollars for US dollars, potentially disrupting the city’s financial system, Deutsche Bank economist Michael Spencer said in a report.
The financial sector would take a big hit if companies such as MSCI reclassify Hong Kong as an emerging market like Shenzhen and Shanghai instead of a developed market, Spencer said.
“A very large share of capital invested in the Hong Kong market will have to leave,” he said.
Hong Kong’s uncertain future is putting it at a disadvantage with other Asian destinations that are competing to attract foreign investment, such as Singapore and Tokyo.
“Over time, people get nervous, and think that this place may not be, my money may not be, as safe as it once was, and I’m going to think about going somewhere else,” said William Reinsch, senior adviser at the Center for Strategic and International Studies. “It sends a signal that Hong Kong is no longer a safe and reliable place to put your money or to do business.”
The national security law has added to worries that Hong Kong’s legal system is losing its independence. The Hong Kong Bar Association says the method for enacting it is a threat: China is circumventing the territory’s legislature by changing its mini-constitution, the Basic Law, to require its government and courts to enforce security measures, regardless of what local lawmakers decide.
Beijing has shown little regard for such considerations, said Reinsch.
“China is not a rule-of-law state, it’s a state where the party makes decisions about what’s going to happen, those are arbitrary decisions, and if that’s what’s going to happen in Hong Kong, it doesn’t bode well for the economy or for the people,” he said.
Bob Broadfoot, managing director of Hong Kong-based research firm Political and Economic Risk Consultancy, said companies might shift legal work to Singapore or other countries.
“Singapore’s going to get more business as a dispute resolution center,” said Broadfoot. “Its legal system, which is a bigger earner, will benefit from Hong Kong’s problems.”
Hong Kong’s troubles and broader global economic uncertainty due to the pandemic also may make it harder for businesses there to attract and retain talent.
Still, some experts believe the concerns over a possible loss of Hong Kong’s special status are overblown.
Many big companies have sizable operations in both the mainland and Hong Kong, and most of Hong Kong’s manufacturing base shifted to China years ago, said Nicholas Lardy, a fellow at the think tank Peterson Institute for International Economics.
“The real economic consequences are fairly limited,” Lardy said.
Hong Kong is still an attractive base for many companies, said Andrew Bishop, a partner with Signum Global Advisers, a risk advisory firm.
Last year’s protests gave businesses time to think, he said.
“At this point, continuing operations in Hong Kong has become a matter of careful calculation rather than a gut reaction to a surprise shock.”


HSBC profit slump adds to bank sector coronavirus woes

Updated 04 August 2020

HSBC profit slump adds to bank sector coronavirus woes

  • London-based bank reports massive slump in net profit, plans to slash 35,000 jobs

LONDON: HSBC on Monday reported a 69-percent slump in net profit, joining a number of major banks whose earnings have been slammed by the coronavirus fallout.

HSBC announced earnings of $3.1 billion compared with almost $10 billion in the first 6 months of 2019, as spiraling China-US tensions also hurt the British-based but Asia-focused lender.

Alongside HSBC results, top French bank Societe Generale on Monday announced a second quarter loss of more than €1 billion as the pandemic forced it to set aside more provisions against bad loans. UK banks Barclays, Lloyds and NatWest all last week reported huge financial hits linked to the pandemic’s fallout.

But there have been some bright spots, with French bank BNP Paribas weathering the coronavirus storm in the second quarter with only a small dip in net profits thanks to a surge in investment banking.

Credit Suisse meanwhile saw net profit jump almost a quarter in the April-June period, also on investment banking gains.

HIGHLIGHT

$1 BILLION - Alongside HSBC results, top French bank Societe Generale on Monday announced a second-quarter loss of more than €1 billion as the pandemic forced it to set aside more provisions against bad loans.

“HSBC has done little to lift investors’ spirits as it brings the curtain down on what has been a costly half-year reporting season for banks in general,” noted Richard Hunter, head of markets at Interactive Investor.

Even though banks “are much better prepared for this economic onslaught than during the financial crisis of over a decade ago ... the immediate outlook is bleak,” he added.

HSBC said that its pre-tax profit slid 64 percent to $4.3 billion in the first half while revenue was down 9 percent at $26.7 billion.

The figures missed analyst forecasts and the bank also raised its estimate for 2020 loan losses to $13 billion from $8 billion.

CEO Noel Quinn described the first 6 months of the year as “some of the most challenging in living memory.” He added: “Our first-half performance was impacted by the COVID-19 pandemic, falling interest rates, increased geopolitical risk and heightened levels of market volatility.”

Even by the standards of the current economic maelstrom engulfing global banks, HSBC has had a torrid time.

Before the coronavirus crisis it was beset by disappointing profit growth, ground down by US-China trade war uncertainties and Britain’s departure from the European Union.

The London-headquartered bank embarked on a huge cost-cutting initiative at the start of the year, including plans to slash about 35,000 jobs as well as trimming fat from less profitable divisions, primarily in the United States and Europe.

The coronavirus upended some of that cost-cutting drive with banks hammered by market volatility and the economic slowdown caused by the pandemic.

But HSBC has a further headache — geopolitical tensions via its status as a major business conduit between China and the West.

HSBC makes 90 percent of its profit in Asia, with China and Hong Kong being the major drivers of growth.

As a result it has found itself more vulnerable than most to the crossfire caused by the increasingly bellicose relationship between Beijing and Washington.

The bank has tried to stay in Beijing’s good graces. It vocally backed a draconian national security law that Beijing imposed on Hong Kong in June to end a year of unrest and pro-democracy protests. The move sparked criticism in Washington and London but analysts saw it as an attempt to protect its access to China, which has a track record of punishing businesses that do not toe Beijing’s line.

But that has not shielded it from Beijing’s wrath. Quinn referenced the bank’s growing political vulnerability in Monday’s results statement.

“Current tensions between China and the US inevitably create challenging situations for an organization with HSBC’s footprint,” he said.

“However, the need for a bank capable of bridging the economies of East and West is acute, and we are well placed to fulfil this role,” he added.