Should I Stay or Should I Go? The Business Implications of Hong Kong’s NSL

8 min readJun 17, 2021

Hong Kong and People’s Republic of China National Flags — Source: Adobe Stock

April 15th, 2021 marked the first National Security Education Day in Hong Kong, which came nearly a year after the passage of the national security law (NSL) in June 2020. The city celebrated the day with China’s military goose step marching, anti-terrorism drills, and resolute speeches on maintaining stability and curbing foreign intervention from a roster of top officials from Mainland China and Hong Kong. Officials hailed the NSL for ending several months of anti-Beijing demonstrations in 2019 and, at the same time, used this to justify a drastic overhaul of the city’s electoral system and governance structure. Electoral overhauls were passed by Beijing’s National People’s Congress as recently as March.

The far-reaching NSL broadly criminalizes “secession,” “subversion,” “terrorist activities,” and “colluding with foreign entities,” without clear definitions, and leaving much room for interpretation. The NSL shocked the city and the world, with many calling the legislation the end of freedom and rule of law in Hong Kong. Others further speculate that economic sanctions, brain drain, and capital outflows in the city are inevitable.

The exodus of foreign capital that critics warned of upon the NSL’s passing has yet to emerge. The city’s overall business environment and competitiveness as a global financial hub remain intact. For those firms keeping their head down and playing by the rules, operations are more-or-less “business as usual.”

Hong Kong’s National Security Law

What Led to the NSL?

The national security law was released against the backdrop of widespread protest demonstrations in Hong Kong, which arose in response to a controversial 2019 bill that would have allowed extradition from Hong Kong to mainland China. The demonstrations further evolved into demands for democratic reform and an independent inquiry into alleged police brutality. While the US House Speaker Nancy Pelosi hailed the mass gathering in Hong Kong as “ a beautiful sight to behold,” the Chinese government held a vastly different view. Beijing instead pointed to violence on the streets, paralysis of the legislature, and raging anti-mainland sentiment.

Despite its murky rhetoric, the Hong Kong security law is a highly targeted policy. For instance, Article 29 of the NSL stipulates that those who collude with foreign entities and advocate for sanctions or blockades, or engage in other “hostile” activities against the Hong Kong SAR or China shall be guilty of an offense. This article is in direct response to several well known political figures in Hong Kong that have launched global campaigns which call on foreign governments to impose sanctions on Chinese officials for their role in undermining the protections afforded under the ‘One Country Two Systems’ framework. Unsurprisingly, Beijing considered these actions to be provocative and responded with legislation to prevent ‘red lines’ from being crossed in the future.

How Has the National Security Law Impacted Business?

Upon passage, many Western democracies denounced the NSL and the United States even went on to remove Hong Kong’s “special economic status.” As a result, Hong Kong is now subject to the same trade restrictions as those applied to the mainland, among other effects. However, despite widespread international condemnation of the law, Hong Kong’s overall business environment and competitiveness as a global financial hub largely remain intact.

The prediction of the city’s impending resignation as a global financial hub was, perhaps, overstated. Hong Kong continues to serve as a significant global financial outpost for mainland China, offering a precious offshore reservoir of expertise in the finance and regulatory sector and an unparalleled gateway of capital flow in both directions.

Foreign Firms Plan to Stay

The perception of the NSL’s impact varies from sector to sector; for example, media outlets have a more direct risk of falling prey to the law than a retailer. Poignantly, though, a survey conducted by The American Chamber of Commerce in Hong Kong has shown that 70.6% of US firms do not have plans to pull out their business operations, assets, or capital. This is despite the fact that 60% admitted that the NSL would have implications for their operations, suggesting that the opportunity in Hong Kong still outweighs the risk.

While certain technology firms like TikTok, Zoom, and media outlets like The New York Times have partially pulled out business operations, studies show little evidence thus far of an exodus of foreign-affiliated companies leaving the city. In 2019, a total of 1,541 new foreign companies set up regional headquarters in the city. In 2020, this number only slightly decreased to 1,504. American companies, on the other hand, established 282 regional headquarters in Hong Kong in 2020, up from 278 the year before.

Chinese Firms Gain New Safeguards

By comparison, Chinese-linked companies and mainland investors scrambling for the Hong Kong market may find safeguards in the NSL. At the end of 2019, protesters began to strategically target the properties of business groups with pro-Beijing links and discriminated against mainland Chinese workers in the city. The imposition of the NSL has resulted in a sharp decline in the number of violent incidents against people and destruction to business properties. The restoration of social order may offer reassurances to Chinese companies, professionals, and investment that the city remains a place of opportunity and stability.

A Booming Capital Market in ‘The Pearl of the Orient’

With political dissent largely toned down, Beijing will make a greater effort to support Hong Kong as a leading market and strong capital base for Chinese state-owned and private enterprises to expand their offshore business and attract global investors. As a leading global financial center, the city continues to serve as a bridge connecting the mainland and global capital markets.

Hong Kong’s strong performance in the stock market is demonstrative of the city’s undiminished status. According to a report from Hong Kong Exchanges and Clearing (HKEX), the city boasted the world’s second most IPOs in 2020, trailing only after Nasdaq and beating its rivals of Shanghai, Singapore, and London. The report also revealed that IPO equity funds in HKEX stood at US$51.28 billion, an increase of 26.5% over 2019.

Additionally, the city’s booming markets suggest that financial activity in the “Pearl of the Orient” remains intact. HKEX market volumes hit record highs at the beginning of 2021. Average daily turnover on HKEX soared to nearly US$50bn in the 30 days leading up to February 16, 2021, compared with about US$10 billion in the same period last year. This figure was almost four times the average daily turnover on the London Stock Exchange (US$9.5 billion) and 60% of the NYSE (US$44 billion) during the same period.

Future Capital Market Developments

HKEX has become a magnet for US-listed Chinese companies as political concerns ramp up. Amid escalating tensions between the US and China, the Nasdaq is set to unveil new regulation and restrictions on IPOs, such as putting a minimum value on the size of pre-listing market capitalization and tightening compliance with US accounting standards. While the regulations make it harder for some Chinese companies to list on the US stock exchange, the clampdown offers an unexpected windfall for The Stock Exchange of Hong Kong. While the US SEC threatens to delist some of Chinese firms from American exchanges, some US-listed Chinese companies have opted for secondary listings in Hong Kong. Chinese e-commerce giant JD.com, for instance, raised US$3.8 billion in a Hong Kong secondary listing in 2020. Hong Kong has remained an irreplaceable sanctuary for mainland Chinese companies seeking global markets while mitigating financial fallout amidst the confrontation between China and the West.

Undoubtedly, an influx of mainland Chinese investors and funds are driving the city’s booming stock market. Nonetheless, a report from Hong Kong Science and Technology Parks Corporation, a HKSAR government-affiliated public corporation, revealed other important factors. For example, Hong Kong is the second largest healthcare and biotech capital formation center around the globe. As such, surging tech and bioscience IPOs have become an area of focus for venture capital investment in the city. According to the report, over 40 new companies, including biotech firms, have listed in Hong Kong following a change in listing requirements permitted IPO filings of pre-revenue companies and dual-class structures.

Should Businesses Fear the National Security Law?

For most businesses in the city, the operating risk associated with falling foul of the Hong Kong national security law under the articles of secession, subversion, and terrorist activities are low. Nonetheless, given that the law is written in broad terms with substantial room for interpretation, foreign firms must be aware of the new legal risks of Hong Kong operations. In particular, foreign companies should be cognizant of article 29 of the NSL, which criminalizes any person or organizations imposing sanctions or blocking or engaging in other hostile activities against China or Hong Kong. For example, a possible infraction may occur when foreign firms take steps to comply with sanctions imposed by foreign governments against particular individuals or entities in Hong Kong, they might expose themselves to the “hostile activities” criminalized by the NSL. While little precedent exists for businesses breaching the NSL, operational uncertainty or the potential for subjective enforcement in relation to the ill-defined NSL may create concern for the future.

Looking Forward at The Pearl of The Orient

Realigning the Formula of “One Country, Two Systems”

Hong Kong’s 2019 anti-government protests have reinforced Beijing’s stance against democratic reform. From implementing the national security law in June 2020 to overhauling the electoral system in March 2021, Beijing has been direct in its hardline approach against the democratic underbelly promised to the city under the “One Country, Two Systems” governance framework.

The motives behind Beijing’s actions are clear. Ever since China embarked on its journey of reform and opening up in 1978, Chinese leadership has prioritized economic development as a driving governance philosophy. The founding tenet of the “One Country, Two Systems” framework that would establish Hong Kong as a launching point into the mainland market was to continue modernizing and reforming the Chinese economy. In this vein, Liao Chengzhi, the former director of the Hong Kong and Macau Affairs Office in Beijing, notably asserted that the importance of Hong Kong “first is money, second is money, and the third is also money.”

Meanwhile, the mainland’s rapid development helped boost Hong Kong’s status as a window to the world. It was estimated that Hong Kong contributed 75% of China’s foreign exchange in the 1970s. Additionally, due to the city’s strategic location and favorable trade status, Hong Kong has been a central point for trade. Around 53% of Chinese exports were shipped through Hong Kong via re-exportation over the period of 1988–1998 as local traders specialized in connecting Chinese and foreign business stakeholders.

However, as the mainland economy continued to grow, Hong Kong’s net contribution to overall Chinese GDP was slowly eclipsed by emerging megalopolises across the harbor. As Chinese companies begin their long march abroad, Beijing’s priorities — particularly in relation to Hong Kong’s role in the economy — have shifted in step. Hong Kong is now not only a locale for foreign companies to enter the mainland market, but also a stepping stone for mainland companies going global. The assurances contained within the NSL for mainland companies are intended to ensure that the founding tenet of the “One Country, Two Systems” framework is upheld, albeit realigned for China’s economy of today.