DENNIS LEE discusses the impact of China’s new National Security Law on Hong Kong’s financial markets.

On June 30, 2020, after an entire year of pro-democracy protests in Hong Kong against tighter control from the Chinese Communist Party (CCP), Beijing passed the Hong Kong National Security Law. The Law, officially titled the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region, extends numerous national security measures from mainland China to Hong Kong. It criminalizes ambiguously worded offenses of separationism and collusions with foreign governments, making the alleged offenders susceptible to prosecution by the Hong Kong judiciary system. Amidst this controversial movement to further unify Hong Kong with mainland China, multiple countries and international organizations issued their warnings of potential consequences of the Security Law. The imposition of the Law would infringe on multiple aspects of civil freedom in Hong Kong and cast a shadow on the city’s capacity as one of the most important financial hubs of the world. A Hong Kong more unified with China may appeal less to investors since the city differs from its neighbor greatly in its capitalist system that allows greater financial freedom with a more independent judiciary. Coming under a firmer grip of the Chinese Communist Party means that Hong Kong will lose its most attractive advantage, including convenience for foreign investment. Since China depends on Hong Kong’s financial status to further its own economic agendas, many speculate that Beijing would not dare to move too far, or it would suffer a heavy loss. The bold decision of the Central Government, however, shows that it is planning on something different.

Hong Kong and China

A former colony of the U.K. for more than a century, Hong Kong has played a crucial role in China’s rapid economic development at the turn of the millennium. By 1997, the year China regained its sovereignty over Hong Kong, the city was already one of the most developed economies in the world. In order to ensure the continuation of Hong Kong’s financial status, the Chinese government made the compromise of “One Country, Two Systems,” granting the Special Administrative Region autonomy in almost all aspects except for defense and foreign relations. As a self-governing territory of China, Hong Kong continued to show its promise as one of the leading financial hubs. As China was still enjoying the economic thrust from the “Reform and Opening Up” of the 1970s, Hong Kong proved to be a further push for China’s rapidly growing economy. The city, with a firmly established financial system and a rule-based legal system, provided access to foreign capital and functioned as a crucial link between China and the rest of the world. Foreign companies and investors could enjoy the opportunities of the Chinese market without worrying about the same kind of regulatory policies in mainland China.

Hong Kong National Security Law and Its Financial Consequences

With the implementation of the new National Security Law, however, situations are expected to change drastically. Many in Hong Kong and foreign countries are afraid that the “Two Systems” aspect will become mere words on paper with Chinese authorities imposing more regulations. Under the Security Law, the newly established Committee for Safeguarding National Security will be able to operate in secrecy and independent of the Hong Kong legal system. The Committee will have powers to scrutinize corporations, non-government organizations, and foreigners living in Hong Kong. The perceived role of foreigners in Hong Kong’s recent unrest has only increased the level of scrutiny and distrust toward foreign investors. Following a statement from the Chinese foreign ministry that Americans who “behave badly in Hong Kong affairs” could be denied entrance, many foreigners working in Hong Kong worry that they could lose their visas. Those who are able to stay eventually are expected to face background checks and surveillance. If the city becomes no longer able to attract foreign investors, it will lose its edge in the global financial world as “China’s window to the world.” In fact, there is expected to be an outflow of capital similar to what happened in 1997.

However, much evidence suggests that this will scarcely be the case. Hong Kong still has a highly profitable management market. After all, the Security Law does not explicitly mention anything with direct links to financial activities (saving those for political purposes). The opportunities presented by the Hong Kong market and its financial potential will not simply diminish as a direct result of the Security Law. In fact, there are few options for those who would like to leave Hong Kong and continue their business elsewhere. Singapore – another Asian financial hub that somewhat rivals Hong Kong – is geographically far from Beijing and therefore presents logistical difficulties for those who are still committed to the Chinese market. Many have also cited the comfortable lifestyle in Hong Kong as an additional reason to remain on the island. 

Further, Hong Kong is benefitting from the recent tension between China and the U.S., if somewhat surprisingly. Many companies based in mainland China are now hesitant to list in the U.S. Market, so they turn toward Hong Kong as a natural choice. Hong Kong public funds have seen a strong inflow of $3.5 billion in the second quarter of 2020, compared to the outflow of $2 billion in the first quarter, according to the data from the SFC. The Hong Kong dollar and the Hang Seng index  – Hong Kong’s stock market index – are both high. All evidence suggests that investors’ faith remains in Hong Kong’s economy. Neither the Security Law itself nor its consequences – such as the U.S. revocation of Hong Kong’s special trade status – has damaged the city’s financial status.

China’s Back-up Plan

Even if the Security Law does cause panic in Hong Kong’s financial market and proves to be detrimental to the city’s economy, the Chinese government does not seem to worry too much. Beijing’s confidence all rests in the fact that, unlike twenty years ago, China is now itself a leading economy, second only to the U.S. in GDP. If the reliance on Hong Kong to access the global financial market was necessary for China twenty years ago, it seems much less important now. Regardless of the situation in Hong Kong, the Chinese market remains attractive for international business. Although Hong Kong is still financially important to China, the world’s second-largest economy no longer needs the city to form a link between the global economy and itself. Rather, Chinese top leadership’s recent emphasis on “dual circulation” – the reinforcements of domestic and foreign markets on each other – signifies the growing importance of China’s internal market and its ability to generate revenue. As a result of an unfavorable international environment, especially exacerbated by increased tension with the U.S., China is forced to depend more on its own innovation instead of relying on the technology of others. The coronavirus outbreak has only affirmed the importance of a self-reliant economic structure. With an increasing focus on a high-end economic profile based on innovation and research, China is putting more resources on mainland cities like Beijing, Hangzhou, and Shenzhen.

Shenzhen, Hong Kong’s Rivalrous Neighbor

While affirming Hong Kong as a “key equal partner” for its financial strength, President Xi has identified Shenzhen, a city neighboring Hong Kong as an “important core engine” of the bay area. President Xi’s new plan for Shenzhen can prove that Hong Kong is no longer irreplaceable. As a fruit of the “Reform and Opening Up” policy, Shenzhen was transformed from a fishing village to one of the largest Chinese cities in four mere decades. The Chinese government established a “Special Economic Zone” in Shenzhen with favorable policies toward foreign investment. The power that Beijing has granted Shenzhen most noticeably includes more say in determining land use. The city will also have more power to pass its own legislation and have more instrumental controls in areas like intellectual property and financial regulation. Through more comprehensive legal protection, Shenzhen is becoming more attractive to high-end and high-tech companies and investments. Shenzhen now enjoys some of the same preferential treatments that Hong Kong received, especially in terms of greater autonomy in implementing policies related to innovation and investment. In 2018, the size of its economy surpassed Hong Kong for the first time. 

Compared to Hong Kong, Shenzhen has two advantages for Beijing to place more weight on it. First, under the direct control of the Chinese government, Shenzhen is more integrated with the economy of other Chinese areas in terms of transportation and trade flows. Under the present pressure of developing the inner provinces, Hong Kong seems more disconnected from the larger Chinese economy, which is shifting away from foreign investment to domestic innovation and technology. Second, Shenzhen is free of the kind of “foreign collusion” that Hong Kong is susceptible to. Investing in a mainland Chinese city like Shenzhen means that the Chinese government will be able to exert a firmer control on the type of investment the market receives. 

The potential shift of focus from Hong Kong to its neighbor Shenzhen indicates a strategic change in China’s economic plan. The concept of the Guangdong-Hong Kong-Macao Bay Area, of which both cities are a part, has been a first link between the economies of Hong Kong and mainland China. Shenzhen, if it plays the lead role in the economic structure of the Bay Area, will bring more attention to China’s domestic innovation and its economic and financial consequences. Instead of relying on the foreign market, product, and investors, China has determined to build a domestic foundation for its own economy. While the past administrations were eager to draw foreign investment and technology to start the Chinese economic engine, Xi is shifting the strategy to focus more on the Chinese consumer market and technology. This concept of self-reliance includes the ability to supply crucial components for the domestic market, such as silicon chips. The Chinese government is aware that the private companies, instead of the state-controlled public ones, are the driving forces behind the technological innovation crucial to the envisioned self-reliance. It is important, therefore, for the government to encourage innovation and research through favorable policies while maintaining its control over the private sector. Home to tech giants like Huawei and Tencent, Shenzhen is a perfect place for China to start this new plan. 


Although the passage of the Hong Kong National Security Law makes Hong Kong’s status as a financial hub uncertain, it is less likely to affect the Chinese economy negatively. Hong Kong has a firm financial system that deeply connects the city with its foreign investors. Even in the case where Hong Kong’s economy does decline, however, China is prepared to deal with its consequences. In fact, some in China might have seen this potential scenario as an opportunity for China to focus on its domestic economic foundation. In this new design of the Chinese economic structure, Hong Kong will play a lesser role.

Dennis Lee can be contacted at