New China security law could stifle research in HK, say analysts

Investors, economists and analysts in Hong Kong fear a new national security law will increase self-censorship of research provided to clients, and will raise questions over the city’s future as a global finance hub.

Beijing has said the sweeping legislation, announced last month in response to months of anti-government protests, is intended to tackle subversion, foreign interference and terrorism in the city. But members of Hong Kong’s financial community are worried about the implications.

One economist at an international investment bank in Hong Kong said they were concerned about stepping “on a landmine” in the views they express on China after the new law comes in. Meanwhile, a bank analyst said the security legislation could make existing trends “exponentially worse” and cause financial research to become “irrelevant”.

Analysts already engaged in self-censorship to an extent in order to maintain relationships with mainland Chinese clients, the economist added, but the new law could “make it institutionalised”. Following the passage of the legislation, research reports written out of Hong Kong could be viewed as less credible by investors, they added.

Sensitivities around investor research in the city have been growing in recent months.

Investment banks in Hong Kong last year avoided mentioning the city’s political turmoil in their notes to avoid upsetting Beijing, the Financial Times reported. An economist at state-owned Bank of Communications claimed he was forced to resign in part over his comments about the impact of the Hong Kong protests. Swiss bank UBS was temporarily shut out of advising on bond deals in China and put a top economist on leave after his comments on a swine fever outbreak prompted a furore.

Hong Kong investors brace for national security law

Fuelling analysts’ concerns is the fact that details of precisely what constitutes a threat to national security have not yet been made public. As a result, many are wondering what kind of material — such as, for example, a piece questioning the veracity of China’s official economic data — could fall under the scope of the law.

Hong Kong, where free speech is currently protected by law, has long been the preferred location in Asia for banks and brokers to provide their clients with research on China’s economy and its markets. But with the new law, some think the legal firewall that separates Hong Kong from mainland China could in effect disappear. 

“Obviously there are reasons for nervousness that didn’t exist a year ago,” said Simon Cartledge, head of Hong Kong-based research company Big Brains. He believes the legislation casts doubt over the city’s viability as a hub for China-focused research.

Some investors believe further self-censorship of research could also encourage more fraudulent activity by companies listed in Hong Kong.

A “crackdown on free speech . . . means that critical speech against companies that commit fraud is going to suffer as well”, said Nathan Anderson, founder of Hindenburg Research. The US-based investor seeks to profit from falling share prices, an approach that often depends on distributing negative research.

“Activist short selling is premised on the right to be critical . . . of often powerful companies — and at times governments [and] government officials,” he said. 

Because of the new security law, he said Hindenburg would never open up an office in Hong Kong, “just as we wouldn’t set up an office in China.”

The law, however, has not yet resulted in any significant public backlash from banks in the city. HSBC and Standard Chartered, which both have a large presence in Hong Kong, have publicly backed the legislation.

Some analysts doubt that the new regime will have a big impact on the city’s ability to produce genuinely useful financial research.

Christopher Wood, Hong Kong-based global head of equity strategy at investment bank Jefferies, said he believed China would be “pragmatic” on the matter and would not seek to undermine Hong Kong’s role as a financial centre. He added that analysts were used to accommodating the demands of governments around the region.

“There’s been [research] self-censorship going on in Singapore for 20 years,” said Mr Wood, who previously spent nearly two decades writing market research for Hong Kong brokerage CLSA.

Others point out that the pressure on analysts in the city to self-censor reflects Hong Kong’s evolution as a financial centre following the former British colony’s return to China. Since then the industry has catered to increasing amounts of clients on the mainland.

“The universe of customers will get . . . more and more China-centric,” said Alicia García-Herrero, chief Asia-Pacific economist at Natixis. “That in itself will create self-censorship, over and above the national security law.”