HONG KONG -- After Beijing's proposals to implement national security legislation in Hong Kong triggered the worst day on the city's stock market in five years, what caught the eye in following days was the number of businesses offering staunch support for the proposal.
In numerous newspaper ads over the weekend and on Monday, various trade organizations and companies connected to mainland China welcomed the legislation. Among those weighing in were China Merchants Group and China Resources Group, two of the major Hong Kong-based Chinese state-owned conglomerates, and the big four state-owned banks. Messages, mostly written in red ink in Chinese, even appeared in the English-language South China Morning Post, owned by Alibaba Group Holding.
The concerted advertising blitz, though, told only one facet of business reaction to Beijing's move. It captured a desire by many companies and organizations not to offend China. But it did not reflect that many in Hong Kong's business community are not nearly so welcoming of the near-certain implementation of the national security legislation -- sentiment perhaps more accurately captured by the Hang Seng index, which rose 0.01% on Monday after Friday's 5.6% fall.
Beijing has made its proposal at a fragile time for Hong Kong, as Tara Joseph, president of the American Chamber of Commerce in Hong Kong, told the Nikkei Asian Review in an interview on Monday. "It's a perfect storm," Joseph said in an interview. "A security law that bypasses the Hong Kong legislature, a recession [amid the COVID-19 pandemic], and a heightening of tensions between the U.S. and China."
China's proposals would set the stage for further legislation that would give the authorities power to punish anyone found to have engaged in terrorism, separatism or subversion, or supporting foreign interference in Hong Kong, and allow Chinese security agencies to operate openly in the city.
Other experts told Nikkei of their fears that the legislation could have a chilling effect on business activity and increase risk for companies and professionals in Hong Kong, hitting its reputation as an international financial center.
Goldman Sachs' team led by chief Asia Pacific regional equity strategist Timothy Moe suggested investors should expect more political upheaval. "While we take no view on the national security law itself, the timeline of its enactment as well as related events, such as the [legislative] elections in September, suggest political issues may remain in focus," they said in a Monday morning note.
Many businesses are very careful not to be seen as taking a stance on political matters. But the equity investment strategy going forward by Goldman was to "favor externally focused themes amid increased domestic uncertainty" for Hong Kong.
Xiong Li, equity strategist at Daiwa Capital Markets in Hong Kong, told the Nikkei Asian Review that he believes the national security legislation "would weigh on the sentiment" of local equity investors. He said the return of violent protests would hit key sectors such as real estate, while intensifying U.S.-China tension could jeopardize Hong Kong's special status and benefits.
An executive in the Hong Kong finance industry who wished to remain anonymous told Nikkei on Monday, "I think a lot of what drove down the market on Friday was fear of further escalation of the U.S.-China conflict -- the potential of Hong Kong having its special status removed by the U.S. and the potential for a much more antagonistic relationship with the U.S. business community and authorities in Hong Kong."
As individual companies and executives may not be able to speak up, business organizations are taking up the role of speaking their minds. AmCham has called for further clarification of the proposed national security legislation, saying in a statement on Friday that the "law may jeopardize future prospects for international business, particularly if a long list of details is not spelled out and clarified."
AmCham also said that the law "will make it harder to recruit and retain top tier talent," noting that recruitment of foreign executives has already slowed.
Joseph expressed that the U.S. reaction to Beijing's move could mean the territory losing its preferential trade status with Washington. "Hong Kong is right in the middle," she said. "Someone has to step back so that Hong Kong doesn't become a victim."
Steve Vickers, who heads a risk consultancy company in Hong Kong, told Nikkei on Monday that clients -- including financial institutions, private equity funds, insurance companies, nonfinancial corporations and high net-worth individuals -- were seeking advice.
"People are asking big questions," said Vickers, including: "Is the Hong Kong dollar a safe bet and should we still be in Hong Kong."
The local currency has been pegged against the U.S. dollar since 1983, when the then-British colony was rocked by the possibility of the Communist takeover, which actually happened 14 years later.
The peg has been a cornerstone of the territory's economic reliability, which helped weather storms, including the handover and Asian financial crisis in 1997.
Vickers himself does not feel the latest move by Beijing will be the end of Hong Kong, but he is waiting for the actual wording of the law. "Devil is in the detail. It will really depend on what it actually says," he said.
Some experts are already pessimistic about what the legislation will look like. "I'm really worried that the details would point to turning people away," said Toru Kurata, professor at Rikkyo University in Tokyo.
The expert on Hong Kong told Nikkei on Sunday that whatever was not favorable for China, even in economic matters, "could be deemed a state secret and be concealed." Journalists and economists who report, write and analyze economic data and issues may not know where the red line is.
"I believe there would be significant impact on reliability of Hong Kong as a neutral international financial center," he said.
Kenneth Leung Kai-cheung, one of the few pan-democratic local legislators representing the business community, has a similar concern. An accountant himself, Leung says, "What if -- when auditing a state-owned enterprise listed in Hong Kong -- an auditor discovers something that they shouldn't have discovered?"
Similar dilemmas could face other businesses, he said. If Beijing is to officially establish a security institution in the territory, their personnel "can go into to any business entities for national security reasons. This is not only inconvenient, but costly for businesses," he said.
"If they don't restrict national security very, very narrowly, it will really, really be worrisome," the lawmaker stressed. Both Beijing and its supporters in Hong Kong are trying to assure that most people are unaffected. But for Leung, "assurances are not laws. They can't be relied upon at all. They can be interpreted widely, so forget it."
Another major uncertainty for businesses is on the impact on the independent judiciary. "The biggest unknown is how court proceedings will be managed in the new era and which judges will preside," said Simon Pritchard, global research director at Gavekal, on Monday. Hong Kong's reputation of having an impartial judicial system under common law traditions was what attracted so many businesses.
He pointed to speculation that local courts, which mediate contradictions involving mainland entities, "could be punted off to mainland-run security courts." He called it a "worst-case scenario that would clearly upend the basic provisions" of the 1984 Sino-British joint declaration, which are the basis of the "one country, two systems" arrangement that is supposed to last until 2047.
What this means for Pritchard is that Hong Kong is becoming more like Singapore, "which has a professional legal system well able to uphold tort disputes, but one that rarely sees individuals seek redress against higher authority in the case of fundamental disputes."
He believes that is "incompatible with running a lot of international activity." Hong Kong "will likely become a more cowed, docile and less creative center," he said.
Additional reporting by Dean Napolitano and Michelle Chan in Hong Kong.