Why Hong Kong Needs Autonomy to Remain a Global Financial Hub

Hong Kong, the semi-autonomous territory of China and former British colony, is behind only New York, London, and Shanghai London in terms of its ranking as a global financial center, according to The Global Financial Centres Index (GFCI 29), published by the think tank Z/Yen Partners in collaboration with the China Development Institute. English is one of the official languages of this centrally-located city-state, which acts as a gateway to the vast mainland China and other Asian markets and is particularly competitive when it comes to human capital and infrastructure.

"Relatively low taxes, a highly developed financial system, light regulation, and other capitalist features make Hong Kong one of the world’s most attractive markets and set it apart from mainland financial hubs such as Shanghai and Shenzhen," wrote Eleanor Albert of the Council on Foreign Relations.

Tensions Between Hong Kong and Mainland China

In a victory for pro-democracy protesters, a controversial extradition bill, introduced by Hong Kong's Chief Executive Carrie Lam, was withdrawn in March 2019. Hong Kong was rocked by protests for 14 weeks after the introduction of the bill, with millions of its citizens decrying the plan proposed by its Beijing-approved government that would allow the extradition of suspects to mainland China.

The amendment was seen as a threat to the region's independent judicial system and as a part of a larger movement to erode its democracy. In September 2019, rattled by the size and intensity of the protests, Lam suspended the bill and apologized for her government causing "confusion and conflict in society." Demonstrators demanded that it be withdrawn completely, and Lam later announced the formal withdrawal of the bill at a meeting after markets closed. Hong Kong's stock market rose the most in a year in response.

At the heart of the decades of resentment in the pro-democracy camp in Hong Kong is the fact that its leader is not chosen by universal suffrage. Since 2017, Lam has served as the Chief Executive of Hong Kong. Lam was picked by an election committee made up of around 1,200 elite residents. Beijing made it clear to the representatives ahead of the vote that Lam was their favored candidate. (Not to mention, the central government has the power to veto any winner if they don't approve of the results.)

Lam leads a cabinet, called the Executive Council, that is also approved by Beijing. Hong Kong also has a law-making body, called the Legislative Council, that is made up of 70 members; half are chosen through direct elections in geographical constituencies and half are elected by special interest groups representing various sectors of the economy.

The Importance of Autonomy for Hong Kong

The ongoing tensions between Hong Kong's people and mainland China raise questions about the former's future as a global financial center. It's possible that Hong Kong may lose some of its relevance as a global financial center if the Communist Party of China continues to ignore its constitutional pledge of "one country, two systems" and the region is transformed into just another Chinese city.

China's Legal System Is Not Trusted Internationally

Because of its colonial history, Hong Kong's legal system is based on English common law due. On the contrary, China's legal system is opaque, and it is not trusted by foreign executives. While Hong Kongers elect leaders from among pro-Beijing candidates, certain fundamental rights and freedoms are still protected in the region.

"Hong Kong's international reputation for the rule of law is its priceless treasure," said the American Chamber of Commerce in Hong Kong in a statement about the extradition bill. "We strongly believe that the proposed arrangements will reduce the appeal of Hong Kong to international companies considering Hong Kong as a base for regional operations."

“Any perceived erosion of independent judiciary and individual freedom could undermine investor confidence and negatively affect Hong Kong’s future as a leading global business and financial center,” said Fred Hu, founder of the investment firm Primavera Capital Group and former chair of Goldman Sachs’s Greater China business.

International Appeal and Agreements

Despite being a part of communist China, Hong Kong has been ranked the world’s freest economy by the American think tank, the Heritage Foundation, for 25 consecutive years.

Hong Kong also has a simple and low-tax system, its own currency pegged to the U.S. dollar, very little internet censorship, and a strong regulatory framework. The region, which is its own customs territory, has also signed trade agreements with foreign states. All of these features of Hong Kong's economy are threatened with an increase of Chinese influence in the region.

In a statement on June 11, 2019, Nancy Pelosi, Speaker of the House, said, “The extradition bill imperils the strong U.S.-Hong Kong relationship that has flourished for two decades. If it passes, the Congress has no choice but to reassess whether Hong Kong is 'sufficiently autonomous' under the 'one country, two systems' framework." 

On June 13, 2019, legislation, called The Hong Kong Human Rights and Democracy Act, was reintroduced by the Congressional-Executive Commission on China (CECC). Among other things, this bill would require the United States Department of State and other agencies to conduct an annual review of changes in Hong Kong's political status (namely, its relationship with mainland China) and reassess whether the unique, favorable trade relations between the U.S. and Hong Kong is justifiable in the future. The passage of the bill was supported by pro-democracy activists in Hong Kong and it received near-unanimous support in Congress.

Political Stability

In 1979, former president of the Hong Kong Economic Association and author Y.C. Jao wrote that one of the reasons the emergence of Hong Kong as a financial center began between 1969 and 1970 (and not earlier) was because China began "groping toward a rapprochement with the West" during this time, which had a "stabilizing effect" on the region. 

Jao wrote, "Thus, even though the Vietnam War was still going on, it became clear to the multinational entities that the region as a whole was poised for a new era of economic development in a relatively peaceful environment. In such a setting, the choice of Hong Kong as the regional headquarters for both financial and non-financial multinational firms was hardly surprising."

Any instances of violence between Hong Kongers and the government create an unstable political environment that makes the region less likely to attract foreign investors and businesses. In mid-2019, a developer dropped its $1.42 billion bid for a land parcel in Hong Kong's Kowloon area because of “recent social contradiction and economic instability.”