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Hong Kong National Security Law: Investment & Business Implications

On June 30, 2020, China’s Standing Committee of the National People’s Congress (NPCSC) passed and implemented the widely anticipated Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region, generally referred to as simply “the national security law.” This move, which skipped the normal legislative process and utilized an exception in the otherwise semi-autonomous application of Hong Kong Basic Law, comes after a year in which territory was engulfed by widespread protests arising in response to a since-withdrawn extradition law amendment, but accompanied by demands for  democratic reform, condemnations of police brutality, and calls for democratic freedoms. However, the support for the demonstrators was not universal, and a significant minority support Beijing, as evidenced in the 2019 District Council elections.

While Hong Kong has been viewed as an unparalleled international hub for trade and investment, the aforementioned social unrest has heightened business concerns and uncertainty. The city still ranks among the world’s easiest places to do business, as illustrated by the World Bank’s Doing Business 2020 ReportCritics, however, have stated that the new national security law’s expansive scope and relative vagueness could lead to a mirroring of the legal system of mainland China. The newfound ability of Hong Kong officials to utilize elements of the law creates a new playing field for business and may re-orient business perceptions of the city.


Hong Kong still presents a vital pathway for capital entering and exiting China. Hong Kong is a conduit for roughly 60% of foreign direct investment flowing in and out of China. It also serves as a centre for Chinese companies to access foreign capital. Chinese officials such as Foreign Ministry Spokesperson Zhao Lijian have stated that the new law works to uphold national security and “targets a very small number of people who are splitting the country, subverting state power, organizing and carrying out terrorist activities, and foreign and external forces that are interfering in the affairs of the HKSAR.” Hong Kong’s Chief Executive Carrie Lam assured Hong Kongers that the law would be applied only to a “small minority of criminals.” This view posits that the law will simply prevent violence and other disruptive forces while still allowing relevant stakeholders, including those with business interests, to benefit from the “one country, two systems” principle.

In this new reality, Hong Kong still presents a viable investment environment to Chinese companies facing regulatory pressure on Wall Street. Chinese firms, including and NetEase, have raised billions via Hong Kong stock offerings since the national security legislation was tabled. According to the New York Times, these follow previous deals from Alibaba and PingAn in November of 2019 that “amounted to endorsements by China Inc. in Hong Kong’s future.” Hong Kong’s economy was already facing serious challenges in the months prior to the global coronavirus pandemic due to continuing large-scale social unrest. The law plays well with those who value stability, especially members of the business community who are decidedly staying out of the fray.

While there is evidence to suggest Hong Kong will continue to serve as an important hub for many firms, foreign companies could grow wary of the side-effects of the security law. Experts such as George Magnus, a research associate at Oxford University’s China Centre speaking to The Guardian, have suggested that the law “could open bankers and analysts in Hong Kong to prosecution” and “accelerate the “withering” of the territory’s status as a global financial centre as companies and workers grew more concerned about doing business there.” While prominent companies with deep ties to both Hong Kong and London, including HSBC, Standard Chartered, Swire, and Jardine Matheson, have publicly supported the law, they have faced widespread Western backlash for doing so. U.S. Secretary of State Mike Pompeo has stated that this type of action constitutes “corporate kowtow” given the hyper-politicized environment governing relations between China and Western economies. 

Many foreign firms, faced with additional uncertainty in the city, could look to reevaluate business and investment related to Hong Kong. One particular area of contention (out of many) is the enforcement of Article 43, which outlines measures the Hong Kong government may take to investigate national security-related crimes pursuant to the law. Facebook, Zoom, and Google, among other prominent tech firms, have already announced plans to suspend data-related requests from Hong Kong authorities while they evaluate the new legislation and rules. TikTok, which is owned by a Chinese company but has said that employees based outside of China make content-related decisions, took an even more proactive approach by fully removing its app from stores in Hong Kong. The South China Morning Post also notes that American companies operating in Hong Kong are also raising concerns around the broad language of Article 29, which “states that it is an offence to steal, obtain with payment or unlawfully provide state secrets or national security intelligence to a foreign country, foreign entity or individual outside China.” Broad language within the Article, it is stated, could expose American companies to prosecution for otherwise innocuous actions.

The new reality in Hong Kong does not preclude foreign companies, including those from Canada, from investing and operating in the city. We still don’t know how the national security law will be applied by the Hong Kong authorities and courts. But it is leading companies to handle matters with increased caution. Foreign sanctions, including those already approved by the United States, will also complicate future engagement. There may not be rapid capital flight, but perhaps additional investment reticence moving forward for companies that previously would have entered the Hong Kong market with enthusiasm.

Canadian Context

The Government of Canada, representing a country with deep economic and people-to-people ties with Hong Kong, has been publicly critical of the new law. Prime Minister Justin Trudeau expressed “grave concern” and announced plans to both suspend Canada’s extradition treaty with Hong Kong and restrict the export of “sensitive military items” to the city. This action led to condemnation from China, including from the Chinese Embassy in Ottawa. China MFA spokesperson Zhao Lijian stated that China “reserves the right to further react” and that “Canada will bear all the consequences arising therefrom.” Hong Kong is, of course, a prominent investment partner for Canada. According to the Trade and Industry Department of Hong Kong, the most recent figures show a Canadian investment position of C$9.5 billion in Hong Kong. Our CIUA Investment Tracker has recorded C$18 billion of cumulative investment from Hong Kong into Canada as of June 2020. 

Some Canadian businesses operating in Hong Kong, of which there are approximately 200, experienced disruption from the pro-democracy protest movement. A November 21, 2019 Global News reportnotes that any Canadian companies involved with the local Hong Kong economy – mainly in areas like restaurants, retail, hotels, and consumer goods – were hit the hardest. But, according to Todd Handcock, president of the Canadian Chamber of Commerce in Hong Kong, the “the majority of Canadian businesses in Hong Kong are in the finance and insurance sector” and remained relatively unscathed from the local disruption at that time.

Moving forward, Canadian companies (or contemplating future investment) will take the same steps noted above in evaluating the new business landscape in Hong Kong. While not directly applicable to Canadian businesses, a recent poll from the American Chamber of Commerce  in Hong Kong (Amcham) provides a look at general sentiment surrounding the issue. While the majority of respondents (members of the Amcham) expressed some level of concern about the law, 65% indicated that they had no plans to leave Hong Kong. For those impacted by Hong Kong’s recent economic woes and protest movement, the law could present a welcome respite from disruption. Others may be wary of potential implications for business, including those arising from the law’s ambiguity and potential foreign sanctions on the city. It is still too early to accurately predict the full range of implications in the months and years ahead.

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