William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."
China's announcement last week that it plans to impose national security legislation on Hong Kong raised grave concerns about the city's democracy. But the economic toll could be sizable, too.
At the very least, Hong Kong can kiss goodbye its status as the world's second-freest economy, a halo bestowed by the Heritage Foundation. The Washington-based think tank has long fetishized Hong Kong's negligible tax rates, duty-free ports, ease of doing business, unfettered capital flows and transparent rule of law.
Worse, last year the U.S. passed the Hong Kong Human Rights and Democracy Act, which mandates an annual review of the city's autonomy; if it finds that China has taken more control, as this move certainly suggests, the U.S. can remove economic and trade privileges Hong Kong enjoys. This would remove its attraction as a gateway to China.
All of this comes as Hong Kong's economy reels from last year's massive protests -- which may now return -- the U.S.-China trade war and the fallout from the coronavirus outbreak.
Hong Kong's gross domestic product fell 5.3% in the first quarter of this year; President Xi Jinping's new move is only going to ensure more economic trouble.
Since 2012, the most powerful Chinese leader in generations has steadily chipped away at many of the reasons multinational companies are headquartered in Hong Kong. His government has cowed Hong Kong-based media into self-censorship; worked to muddy business ownership reporting to make it harder to find out who owns companies; and imposed "patriotic" education on students.
During last year's protests, Beijing strong-armed companies like Cathay Pacific to punish employees supporting Hong Kong's pro-democracy movement and ousted Cathay's chairman and CEO.
Xi is "completely destroying Hong Kong," Dennis Kwok, a pro-democracy politician, told fellow lawmakers. Xi's latest maneuver, he says, "is the end of 'one country, two systems,'" the concept that enabled Hong Kong to run a world-leading financial system without meddling from Beijing.
There are plenty of direct ways the new national security law could backfire on economic freedom in Hong Kong.
For example, it criminalizes "foreign interference" without specifying who the measure targets or where the boundaries lie. Might a Goldman Sachs report out of Hong Kong questioning China's gross domestic product data put its business charter at risk? What about Nomura Holdings downgrading a key China Inc. company?
International news organizations might feel paranoid about reporting on fraud at Hong Hong-listed companies or China corralling more than 1 million ethnic minority residents in Xinjiang province into "indoctrination camps." It is hard to see how short sellers like Muddy Waters Research maintain Hong Kong offices when they spotlight alleged fraud at mainland companies, most recently Nasdaq-listed Luckin Coffee.
The extradition bill that helped fuel the 2019 protests, which allowed people to be moved from Hong Kong to the mainland, could return, perhaps imposed by fiat from Beijing. What multinational corporate board or startup team eying an IPO wants to have that worry in the backs of their minds? Or the specter of the Chinese Communist Party remaking Hong Kong's judiciary and banking system in its image?
The more Xi damages China's liberal financial zone, the more the foreign companies generating millions of jobs in Hong Kong will question why they should stay.
This is all before we consider that last year's protest might imminently return, COVID-19 social-distancing be damned. "The reaction in Hong Kong could be intense, and violent," says Bill Bishop, author of the widely read Sinocism newsletter, wrote to readers on May 21.
The protests lasted six months and drove Hong Kong into its first recession in a decade. They devastated retail sales in a city that derives 65% of GDP from private consumption. And they ravaged tourism sharply and slammed property markets: average home prices fell 29% in 2019 and have continued to drop since. The declines are likely to continue as Xi methodically morphs Hong Kong into just another mainland city.
If Chief Executive Carrie Lam and Financial Secretary Paul Chan still have jobs in a month, their roles may be little more than delivering bad news from Beijing -- not just on GDP, but how the Hong Kong that libertarians loved is dying a little more each day.