Beijing seeks to reassure business over Hong Kong security law

China has sought to reassure international investors that a proposed national security law that critics say gravely threatens Hong Kong’s autonomy would instead improve the business environment in the Asian financial hub. 

Speaking a day after pro-democracy protesters returned to the streets of Hong Kong following a hiatus during the coronavirus epidemic, Xie Feng, China’s foreign ministry commissioner in Hong Kong, said the proposed legal changes would restore calm following a year of unrest.

“The international community can rest assured about the legislation for Hong Kong,” said Mr Xie. “The legislation will alleviate the great concern among the local and foreign business communities about the violent and terrorist forces attempting to mess up Hong Kong . . . and will create a more law-based, reliable and stable business environment for foreign investors.”

The speed of the announcement from Beijing last week that it planned to impose the new legislation on Hong Kong caught many investors by surprise and has raised concerns over the city’s future as a global financial hub.

The proposal to draft the law is expected to be passed by China’s rubber-stamp legislature on Thursday. It would prohibit treason, secession, sedition and subversion, and permit China’s state security services to maintain a formal presence in the semi-autonomous territory.

Hong Kong is required to implement an anti-subversion law under its mini-constitution, the Basic Law, which grants the city a high degree of legal and political autonomy from Beijing. Critics say Beijing’s plan to instead impose the law on the city threatened to undermine rule of law in the territory.

On Sunday, police fired tear gas and arrested about 180 people among the thousands who marched to protest against the new law.

Riot police at the pro-democracy rally in Hong Kong on Sunday © AFP via Getty Images

Mr Xie told a gathering of Hong Kong’s diplomatic community, chambers of commerce and journalists that the proposed legislation was also aimed at improving the state of Hong Kong’s economy, which fell into recession for the first time in a decade last year. 

“Only in this way can Hong Kong strengthen its status as an international financial, trading and shipping centre and can Chinese and foreign business here have a more profitable future,” Mr Xie said. 

Investors are scrambling to figure out the implications of China’s move to impose the law.

The Asian financial hub’s benchmark Hang Seng index dropped as much as 1.8 per cent on Monday morning, before recovering those losses to close 0.2 per cent higher.

Line chart of Hang Seng index showing Hong Kong stocks hit by security law concerns

“It’s quiet. It’s really quiet,” Andy Maynard, a Hong Kong-based strategist at China Renaissance, said of trading activity on Monday. “People are pretty much sidelined . . . liquidity is not that great and turnover is down significantly.”

Mr Maynard said traders were holding their breath for potential retaliation from Washington against a backdrop of rising US-China trade friction. The Hang Seng index plunged 5.6 per cent on Friday after Beijing announced the proposed legislation.

Some investors in the city had rejigged their portfolios in recent weeks out of concern that political tension could flare up again.

Ronald Chan, founder of Hong Kong-focused fund Chartwell Capital, said he had significantly reduced his allocation to the city’s stocks ahead of the security law announcement. He is instead holding more cash and looking at opportunities in Japan.

“We all knew this was going to happen. We have done what we can to hedge the market and brace for the storm ahead,” Mr Chan said. “The national security law could be the breaking point between China and the US.”

Other investors said that the city’s market was likely to perform poorly until there was further clarity on how the law would be applied.

“The security law news will lead to general Hang Seng index underperformance until we see how far the Chinese Communist party are prepared to take this,” said Richard Harris, a Hong Kong-based investor and former Citigroup and JPMorgan director in the city.

“Is it just going to be a Sword of Damocles hanging over Hong Kong, or are they going to take the idea of national security so broadly as to arrest any opposition? That’s going to take time to become visible.”