The United States of America and China have been at loggerheads with each other for a while now. Even after the truce to the Trade War, starting in July 2018, their relations have been far from ‘good’. The current COVID-19 pandemic led to the widening of this gap. The announcement of The New Security Act by Beijing for Hong Kong and the bill for delisting of Chinese firms from the US Stock Markets, set the ring again for these two economic giants to fight. These events have received mixed reactions from individuals, institutions and countries. Although most view these events as mutually exclusive, it is not unknown that political and foreign policy changes lead to shifts in economic and fiscal policies as well. However, before investigating the link between the two, it is imperative to understand them in isolation.
The New Hong Kong Law
Hong Kong is officially known as the Hong Kong Special Administrative Region of the People’s Republic of China. A Special Administrative Region (SAR) is a provincial level administrative division in China which enjoys the highest level of autonomy. The special status and the significance of Hong Kong comes from its history. Hong Kong was ceded to the British Empire by the Qing dynasty, after the latter’s repeated losses in the two Opium Wars. Post liberation from Japanese in WWII, Hong Kong saw a rise in its population due to the heavy influx of refugees from mainland China due to the Korean War and the Economic Revolution in China (aka the Great Leap Forward). Over time, Hong Kong developed itself from a transhipment city to a manufacturing and industrial hub with emerging commercial and financial industries. By the end of the 20th century, the United Kingdom returned Hong Kong to China as an SAR establishing the Hong Kong Basic Law. Despite enjoying much autonomy, there seems to be plenty of civil dissatisfaction in Hong Kong over growing influence and interference by mainland China. In this backdrop, the new securities law is seen as another attempt to snatch Hong Kong’s autonomy, irking ‘Hongkongers’ and certain ‘western countries’ further.
The New Securities Law isn’t enforced yet in Hong Kong. After being passed as a draft resolution in the Chinese Parliament in mid-May it is due to be presented as a draft law soon. The details available regarding the content are scarce. However, it is known that the new law would make criminal any act of secession, subversion, terrorism and interference by foreign governments in Hong Kong. Secession is defined as an act of breaking away from China. Subversion is challenging or disregarding the power and authority of the central Chinese government. Lastly, terrorism is using violence and intimidation against people. Quite interestingly, these definitions seem to clamp down the basic autonomy and freedom Hong Kong enjoys. China seems to defy the Basic Law; whereby Hong Kong is supposed to enjoy the freedom of speech, the right to protest, and an independent judiciary alongside other democratic freedoms. Moreover, Basic Law entitles Hong Kong to make its own Security Law. It is also speculated that China might set up institutions directly under the central government’s control responsible for Hong Kong’s security alongside the city’s own. Hongkongers fear losing their freedoms and adopting a Chinese system of judiciary and administration. Seen as an attempt to assimilate mainland’s administrative control over Hong Kong further, China is sure to push it into existence at the earliest.
Countries have responded to Beijing’s move in different ways. Recently, in a closed UN Security Council meeting, the US and the UK clashed with China and Russia over Beijing’s New Law. Flinging allegations continued beyond the committee room onto twitter. The Chinese mission to the UN tweeted that the US and the UK’s attempt to formally discuss the Hong Kong law “failed” because there was “no agreement” and “strong opposition to this idea”. In the crossfire, the US called upon all UN members to demand China to “reverse [its] course and honour its obligation to this institution & Hong Kong’s people.” It also observed that Beijing’s actions “contradict” the UN registered Sino-British agreement over Hong Kong. It also threatened China with sanctions under the Hong Kong Human Rights and Democracy Act of 2019. President Trump alluded to possibly stripping Hong Kong of its special trading privileges with the US which include lower tariffs for Hong Kong, contrasting to the Chinese mainland. Amidst this, Britain pointed towards the possibility of it offering a way to British citizenship to the 350,000 British National (Overseas) passport holders in Hong Kong though China maintains that all Hongkongers are Chinese nationals. Several countries jumped in to criticise China over the law including Australia, Canada, the European Union and even Taiwan. China continues to stand its ground, asking countries not to interfere in its domestic affairs.
Domestic Affair, Why Care?
The significance of Hong Kong in the global free market seems to reason out the alacritous responses of many countries in defending its autonomy from the mainland. Hong Kong has established itself as a manufacturing and trading hub with strong financial institutions. Due to a high level of autonomy, it has become one of the most developed free market economies. The ease of carrying out business due to low tariffs, established free market, less government intervention, fairer judicial system and access to capital and financial investments, has made Hong Kong’s GDP per capita rise to about $50,000 being one of the highest in the world. Additionally, it is located at a vantage point. It provides close access to Asian markets, especially entry into the huge Chinese market. According to the US Department of State, US trade surplus with Hong Kong amounted to $32.6 billion in 2017 alone. Moreover, many US firms have operations in Hong Kong. Several European countries also enjoy fruitful trade with Hong Kong. The above-mentioned reasons make Hong Kong an integral part of the global free market system. Due to the proposed law, countries fear that there might not remain any policy difference between China and Hong Kong and the ease of doing business might be jeopardised. Free market intervention, obstruction of justice and curbing of civil liberties under the new law are the prime reasons why countries have sprung into immediate action.
China seems to have made a vow to bring the new law at all costs. Hong Kong is the gateway for foreign firms to invest in Chinese markets and thus brings a lot of Foreign Direct Investment (FDI) into China. This has made Hong Kong a crucial part of the Chinese economy and its growth. The 2019 student protests in Hong Kong over the Extradition Bill put Beijing under the fear of losing Hong Kong in a secessionist movement. Pro-democracy protests were interpreted as the death-knell for a sizable part of the Chinese economy. Mainly because no Chinese city would be able to rise and replace Hong Kong; unless they are given much more autonomy. Therefore, the law appears as a desperate attempt to bring ‘order’ to Hong Kong. According to Bloomberg reports, this decision has already started to show its ill-effects on the Hong Kong Financial Markets. Out of suspicion, people have already started pulling money out of Hong Kong Markets, leading to a fall in the stock prices. China seems to have turned a deaf ear to these events and is set on bringing the new law in Hong Kong.
Delisting of Chinese Firms
Recently, US Senators have started pushing the bill which will require all foreign firms to provide audit reports and be transparent in their activities if they are to be listed on the US Stock Exchanges. Failure to comply with the set rules could lead to delisting of the firms from stock exchanges under the new guidelines. Focusing particularly on Chinese firms, US lawmakers want China to play by the book if they want to be traded on US Markets, which brings home a lot of investment for China. Firms like Alibaba Group Holding Ltd, Baidu Inc, JD.com Inc together hold market capitalization of more than $500 billion. Creating a fear of losing such a market is what the US Senators expect to do in order to pressurise Chinese authorities. Chinese authorities have been reluctant for long over allowing foreign regulators to inspect local firms citing national security concerns – a classic Chinese move to stall any inspection. US Senators, since June, are pushing this bill to make Chinese firms “submit to regulatory oversight” or face delisting. Amidst the current flare between the two economic giants, this move was accompanied by the President’s threat to put sanctions on China if the new law were to be passed.
There seems to exist a clear link between Beijing’s Law and Washington’s move. Experts point out that individual delisting incidents aren’t uncommon. Firms turn themselves private or might constantly get delisted over regulatory issues. However, forced delisting at such a large scale, especially due to geopolitical reasons would be unprecedented. For example, despite imposing sanctions on Russia over the Ukraine dispute in 2014, Russian firms continued to be traded on US Stock Exchanges. More than 150 Chinese firms would be delisted from US Exchanges if the current bill comes into effect. Some senators say that the bill is intended to prevent the outflow of money from the US into China. However, there is enough reason to say that Beijing’s new security law in Hong Kong could have motivated this. Curbing freedoms and ease of doing business in Hong Kong directly affects US firms operating there, leading to huge economic losses. Moreover, increased Chinese interference in Hong Kong markets would mean increased difficulty for US firms in getting investments and carrying out business. Hence, it is logical for the US to go after Chinese firms in the rising US Markets.
The fact that either of these bills are in their drafting stages adds on to the uncertainty about the future. The US elections surely will play a huge role in defining the future relations between the two nations. Although Beijing’s new law and delisting of Chinese firms can be viewed separately, their interlink is quite clear. It would be very interesting to see how the situation unfolds. Will the two states come to a table and have fruitful dialogues, or will they continue playing global peace and security. Only the future will tell.
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Deepanshu Singal is an undergraduate student at Ashoka University with a keen interest in Economics and International Relations