SITUATION UPDATE BRIEF: HONG KONG – DOING BUSINESS IN A KEY BATTLEGROUND OF CHINA-US RIVALRY: OUTLOOK AND SCENARIOS

Key takeaways


International businesses operating in Hong Kong will increasingly be caught in the middle of the intensifying China-US rivalry. Financial institutions in the territory will likely be at the sharp end of a legal quagmire, as full compliance with Washington’s latest asset-freeze sanctions may contravene Hong Kong’s sweeping new national security law.


Chinese authorities will use the security law to keep businesses out of any political discussion over Hong Kong. Individuals and/or companies will likely be punished if they show sympathy or support for the pro-democracy movement. On the other hand, treading Beijing’s line risks a strong public backlash both in Hong Kong and across the globe, potentially resulting in a loss of business due to reputational damage.

 

While the risks of unrest and associated disruption have moderated in the short term following the 12-month postponement of the legislative election, the delay will prolong political uncertainty in Hong Kong, and could attract fresh international criticism over the city’s eroding democratic framework.


The geopolitical climate will likely turn more hostile for international firms operating in Hong Kong over the next two months, as US presidential election campaigns ratchet up anti-China rhetoric from both camps. Nonetheless, the outcome of the November poll could provide an opportunity for re-setting the trajectory, as well as the focus, of the China-US relationship, and its impact on Hong Kong’s business environment.


Background


Washington’s recent move to impose sanctions against Hong Kong’s Chief Executive Carrie Lam and 10 other senior officials for their involvement in the promulgation of the highly controversial new security law puts many financial institutions in the city into a legal quagmire. In order to comply with the asset-freeze sanctions imposed on the 11 politicians, banks that have incorporated entities or foreign branches in the US may need to sever business ties with the sanctioned individuals, especially with regard to USD-based banking services (payments, transactions and loans, etc).


At the same time, adhering to the US sanctions could be in violation of the sweeping national security law. Article 29 of the law makes colluding with foreign forces to impose “sanctions or blockade, or engaging in other hostile activities” against Hong Kong SAR or China an offence.


The delicate situation in which international banks now find themselves illustrates the rising risks (reputational, regulatory, and operational) facing foreign companies doing business in/with China. Against the backdrop of intensifying US-China animosity…

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