Companies in Hong Kong fear being crushed between China and US

US business groups say a Biden administration warning about the risks of operating in Hong Kong has made life more difficult for them as they navigate a sweeping security crackdown by China.

Citing the introduction of a tough national security law in the Chinese territory last year, the US “business advisory” on Friday warned of greater surveillance of commercial data as well as threats to freedom of information from Hong Kong’s clampdown on the previously free media.

But businesspeople in the city said they were already aware of the risks, and complained that the advisory made it harder for them to convince their head offices of the continuing benefits of operating in the territory.

“The general tone is the business community doesn’t need Foggy Bottom to tell them there are risks or how to manage them,” a person close to US multinationals said, referring to the US state department.

The American Chamber of Commerce released a statement shortly after the advisory was published emphasising the value that its members placed on operating in the city.

“This adds another layer of complexity to being an American business person in Hong Kong,” Tara Joseph, the president of the American Chamber of Commerce, said of the advisory.

“It was perhaps a bit worrying as to why it’s getting laid out this way, leaving people to wonder if Hong Kong is at increased risk of getting crushed in the US-China tensions when Hong Kong still has special qualities.”

Since the introduction of the National Security Law last year, jails are filling up, people seen as disloyal to China have been targeted by the government and the civil service, media and education systems are being remodelled to bring them closer to those in mainland China.

But the shift has not prompted an exodus of banks and foreign companies, which are eager to take advantage of China’s pandemic recovery and the promise of financial market liberalisation on the mainland.

A member of the US business community in Hong Kong said that while many were “horrified” by police carting off pro-democracy activists in unmarked vans, they do not see it as relevant to their business. “Over 90 per cent of the Fortune 500 is represented in Hong Kong and they are going nowhere, China still represents the strongest consumer market globally,” a US banker in Hong Kong added.

Joseph said there was a host of reasons why business wish to stay in Hong Kong. “[Hong Kong is] tax efficient, it is an international hub and there is a reason for company legal teams to be based here.”

US officials, however, say that China “can’t have it both ways” and insist the political situation will affect the business environment. Biden issued the advisory partly because he felt that companies were not taking the escalating risks seriously enough, one told the Financial Times.

“Imposing a mainland system just isn’t compatible” with being an attractive international financial hub, another US official said.

Business in Hong Kong have tried to adapt to the new security regime. They have trained staff on how to respond if authorities raid their offices and demand documents without court warrants. Increasingly uncomfortable about holding data in the city, some have moved their servers offshore.

The Hong Kong government is pursuing a host of other laws which have caused further discomfort. It confirmed on Friday that it would pursue tough anti-doxxing laws, the details of which have concerned US technology companies such as Google and Facebook. Under the laws, which apply extrajudicially, employees could face jail time for failing to remove material posted online under orders from the city’s privacy commissioner.

Despite the US moves, there is no sign of a change in course from China, nor the Hong Kong government. “The words and deeds of foreign business leaders fully demonstrate that the business environment in Hong Kong has not been undermined after the implementation of the [security law]. On the contrary, it has become even better,” Edward Yau, the city’s commerce secretary, said.

Analysts question what the US advisory will achieve beyond political posturing. It contains no new legal obligations for US business, although the US separately sanctioned seven mid-level Chinese officials in Hong Kong, a move Chinese state media said exposed the US as a “paper tiger”.

Kurt Tong, the former US consul general in Hong Kong said: “The US government is discovering that there are few ways to punish China for its broken promises in a Hong Kong-specific way without also seriously harming US interests and longtime Hong Kong residents. ”

Chinese government attempts to push back at sanctions could toughen the balancing act for US business in Hong Kong, however.

Beijing’s recently passed laws allow sanctions to be imposed on anyone who helps foreign nations enforce sanctions against Chinese companies and officials. The US said the legislation did not explicitly exempt Hong Kong-based operations.

Enforcement of the counter sanctions laws in the city could force business to separate their China and Hong Kong operations from the rest of their global business, Douglas Arner, a law professor and financial regulation expert at the University of Hong Kong said.

But Christine Savage, a sanctions expert and partner at King & Spalding, cautioned that there was no guarantee that this would protect companies from potential punitive action by Beijing.

“There’s certainly concern that there could still be retaliatory measures [because] the national security law has language that suggests you can be held accountable in China for actions that you take outside of China,” she said.