Hong Kong has for more than five decades existed perched on the event horizon generated by the geo-political angst of China and U.S. relations. During that time the territory has not only survived but thrived as it transitioned from a far flung Royal Crown colony of the United Kingdom to the present SAR (Special Administrative Region of the Peoples Republic of China via the 1997 handover). Under the slogan “One Country Two Systems,” Hong Kong enjoyed more economic freedom (according to the Heritage Foundation’s rankings Hong Kong was first for 25 straight years – see below) than any nation in the world. “Basic Law,” the framework by which Hong Kong was to be administered, gave the SAR a wide range of freedoms both individually and corporately largely unavailable in China.
The economy was resilient and managed to prosper through economic downturns like 1997 [Asian Financial Crisis] and 2008/09 [The Great Recession]. This isn’t to say Hong Kong didn’t suffer during the economic downturns – it did, especially in the real estate and financial sectors – but was able to weather the inclement times.
Hong Kong’s Evolving Role
Hong Kong’s position [figuratively and literally] as conduit for China trade and investment has been the foundational element of the economy: Being the ultimate “insider” but outside of the PRC (People’s Republic of China) has been the key to success for many Hong Kong businesses engaged directly and indirectly in the “China Trade”.
The Port of Hong Kong also reflected the “entrepot” dynamic, rising to become one of the largest container ports in world as a go-between for trade moving in and out of China. During the 1980s, it could have been argued that the Port of Hong Kong was defacto China’s largest port for handling foreign merchandise trade [excluding bulk oil and other dry bulk products]. A byproduct of the port activity was the development of an extensive logistics sector. This logistics sector’s activities piggy backed on an extensive sourcing network that linked China’s manufacturing to Western markets.
Since the handover from the United Kingdom to China in 1997 and with the rise of the Chinese economy, the role of Hong Kong has changed. While still a key entry point and staging area for businesses operating in the China market, the City’s pro-business approach has made it a desirable location for regional head offices – competing mainly with Singapore and to a lesser extent Bangkok, Kuala Lumpur and Jakarta. The City also provided a platform for China’s own entrepreneurial excursions with access to foreign markets and capital. And Hong Kong’s well-honed logistics sector provided exportable expertise not only to PRD (Pearl River Delta) companies and other Chinese enterprises but globally. And Hong Kong has been able to add a significant fin-tech and hi-tech element to its impressive portfolio of business services.
There are innate challenges to being a speck of land – a mere 428 sq/miles – on the Southern tip of an immense continental China. The territory with a population of over 7.5 million is and has been struggling with housing, employment, economic mobility and other problems of a highly urbanized society while battling COVID-19 and the financial fallout from both the pandemic and the ongoing political strife between the US and the PRC. In tandem with geo-political wrestling between the US and China is Hong Kong’s own domestic unrest, that has seen many dissidents detained, autonomy curtailed, and attracted the ire of Western nations with the UK taking the unusual step of agreeing to take in Hong Kong holders of British National Overseas (B.N.O.) passports and giving the holders a pathway to citizenship. Earlier, the US removed Hong Kong’s previous preferential trading status, and also sanctioned officials, including Hong Kong’s Chief Executive Carrie Lam Cheng Yuet-ngor.
Hong Kong: Between a Rock and Another Rock
In response to numerous protests, Beijing has taken to exerting a firm hand with the unruly region. On June 30th 2020 China’s The Standing Committee of the National People’s Congress enacted the National Security Law and listed the legislation in Annex III to Hong Kong’s Basic Law. This legislation effectively aligned Hong Kong’s regulatory security apparatus with that of the PRC. The National Security Law took aim at opposition to the regime from all quarters with the goal of returning Hong Kong to a version of “normalcy”.
Hong Kong’s Chief Executive Mrs. Carrie Lam Cheng Yuet-ngor on July 5th at the National Security Law Forum entitled “Security Brings Prosperity” the government’s view of the of the legislation said, “Indeed, safeguarding the country’s sovereignty, security and development interests is the constitutional responsibility of the HKSAR. They are also the prerequisites for Hong Kong’s long-term prosperity and stability. The implementation of the National Security Law therefore not only aims to end the chaos and violence associated with the legislative amendment exercise in June 2019, but also to uphold and improve the institutional system of “One Country, Two Systems” fundamentally, ensuring the steadfast and successful implementation of “One Country, Two Systems”.
Still, nothing involving Hong Kong, not even the new National Security Law, can be viewed in isolation to greater geo-political issues between China and the US and indeed the West as a whole. Simply put, Hong Kong is stuck between a rock and another rock – and the gap between hard places is narrowing.
From the perspective of foreign businesses domiciled in Hong Kong the vagueness of the security regulations is troublesome, as is the deterioration of “internationalism” for a City that was often considered among the very top of international cities.
Coming back to the Heritage Foundation “2021 Index of Economic Freedom” Hong Kong was nowhere to be found, as the territory has been dropped from the ranking. The Foundation explained the omission from the index as follows: “Hong Kong and Macau are thus no longer included in the Index. No doubt both Hong Kong and Macau, as Special Administrative Regions, enjoy economic policies that in many respects offer their citizens more economic freedom than is available to the average citizen of China, but developments in recent years have demonstrated unambiguously that those policies are ultimately controlled from Beijing. As appropriate in the future, developments in Hong Kong or Macau that are relevant to economic freedom will be considered in the context of China’s evaluation in the Index.”
It is worth noting that Hong Kong was a 90.2 (number 1) when last ranked. In the current rankings China on the other hand was ranked 107th with a score of 20 while Singapore ranked number 1 with a score of 89.7.
There is also the potential for the geo-political situation to worsen.
On June 10th China’s NPC (National People’s Congress) adopted a “blocking statute” which enables the Chinese government to take “counter measures” against foreign sanctions through the denial of visas, seizure of property, restrictions of activity within China and “other necessary measures”.
This law supplements earlier measures aimed at protecting China’s interests, including new export controls such as the Chinese Ministry of Commerce’s “unreliable entity” list announced in September 2021, and its Order No 1 of January 2021, which required businesses to report instances of foreign legislation affecting operations.
Hong Kong-based Steve Vickers Associates (SVA), a firm that does risk assessment analysis for business in the July report wrote “China’s blocking statute thus highlights how sanctions risks are intensifying, posing acute challenges to businesses in Hong Kong, as well as more widely.”
Top Ports in China
| Port | 2019 TEUs | 2020 TEUs |
|---|---|---|
| Shanghai | 43,303,000 | 43,500,000 |
| Ningbo-Zhoushan | 27,535,000 | 28,720,000 |
| Shenzhen* | 25,769,000 | 26,548,000 |
| Guangzhou | 22,223,000 | 23,170,000 |
| Qingdao | 21,012,000 | 22,010,000 |
| Tianjin | 17,301,000 | 18,350,000 |
| Hong Kong | 18,303,000 | 17,960,000 |
| Xiamen | 11,000,000 | 11,410,000 |
| Suzhou (Taicang) | 6,270,000 | 6,629,000 |
| Dalian | 5,110,000 | 5,110,000 |
| Beibuwan | 3,423,900 | 5,050,000 |
| Rizhao | 4,500,000 | 4,860,000 |
| Lianyungang | 4,760,000 | 4,780,000 |
| Dongguan | 3,680,000 | 3,420,000 |
| Fuzhou | 3,200,000 | 3,380,000 |
| Nanjing | 3,310,000 | 3,020,000 |
| Tangshan | 2,943,000 | 3,020,000 |
| Quanzhou | 2,580,000 | 2,260,000 |
| Haikou | 1,970,000 | 1,970,000 |
Hong Kong: Land of Opportunity?
While there are innumerable challenges at play in Hong Kong, the territory is well-placed for global business – particularly enterprises focused on the PRD region. Ports like Guangzhou, Nansha, Shenzhen, Sekou and Yantian are growing – no doubt partially at the expense of the Port of Hong Kong. But Hong Kong’s influence on the logistics and in the manufacturing and finance in the PRD is hard to under estimate.
The American Chamber of Commerce in Hong Kong (AmCham) which has been operating in Hong Kong for 50 years and recently purchased a new headquarters in Central [Hong Kong’s financial district] wrote in their July newsletter of the “Business Environment” in Hong Kong: “AmCham is well aware of an increasingly complicated geopolitical environment and its risks; particularly those which have evolved in recent years. The environment is more complex and challenging. We are here to support our members to navigate those challenges and risks while also capturing the opportunities of doing business in this region. Hong Kong remains a critical and vibrant facilitator of trade and financial flow between the East and West. Hong Kong has one of the best developed infrastructures in Asia, it has an internationally recognized system of commercial law, it has a more open and sophisticated digital infrastructure than many of its Asian peers. Its financial market is among the top five in the world.”
Is Hong Kong still a land of opportunity for businesses? It is obvious that the risk factor – especially for U.S. firms – has been ratcheted up. But many of the commercial fundamentals are still in place, that made Hong Kong the only state in the world to score over 90 in the Heritage Foundation’s economic freedom index.
