US sanctions on Hong Kong: How far will they go?

With the new national security law for Hong Kong practically a done deal, the US has said it will withdraw Hong Kong’s preferential trade status, as it is no longer autonomous from mainland China. But considering the US’s own interests in Hong Kong, how tough will its sanctions be? Zaobao correspondent Chen Jing speaks to academics to find out.
A demonstrator holds a sign reading "One Country, Two Systems is a Lie" as he marches through the Causeway Bay district during a protest in Hong Kong, 27 May 2020. (Lam Yik/Bloomberg)
A demonstrator holds a sign reading "One Country, Two Systems is a Lie" as he marches through the Causeway Bay district during a protest in Hong Kong, 27 May 2020. (Lam Yik/Bloomberg)

“Mr President, you’re the only one who can save us. If you save us and stop China’s aggressions, you also save the world.”

Hong Kong’s pro-democracy camp, which had intended to force the central government to give in through massive destructive actions of laam caau (攬炒, meaning mutual destruction), has been caught off-guard by Beijing’s unexpected national security law for Hong Kong. In an interview last week, Next Digital Limited founder and pro-democracy leader Jimmy Lai called for US President Donald Trump to step in with sanctions for China and stop the new law from being implemented.

After the law kicks in, Hong Kong will play a diminishing role in the China-US competition.

Trump announced on Saturday that the US is stripping Hong Kong of its preferential trade status as it is no longer autonomous from mainland China, and will also sanction Chinese and Hong Kong officials “directly or indirectly involved in eroding Hong Kong’s autonomy”. However, he did not mention details of sanctions against Hong Kong, or withdraw from the phase one trade deal with China reached early this year.

Among the possible US sanctions against Hong Kong, the harshest is revoking Hong Kong’s independent tariff status, which means that Hong Kong is subject to the same US tariffs as mainland China. Furthermore, it may become difficult for Hong Kong to import technology products that Washington sees as strategic, while the pegged exchange rate of the Hong Kong dollar to the US dollar is also at jeopardy.

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U.S. President Donald Trump makes an announcement about U.S. trade relations with China and Hong Kong as National Security Advisor Robert O'Brien, Secretary of State Mike Pompeo and Treasury Secretary Steven Mnuchin listen in the Rose Garden of the White House in Washington, 29 May 2020. (Jonathan Ernst/REUTERS)

Washington will hold back on sanctions

However, academics that Zaobao spoke to generally felt that Washington will hold back on sanctions against Hong Kong, so as not to hurt US interests there. Beijing has probably also taken this into account, and decided to roll out the security law after weighing the situation, so that Hong Kong will not continue to be a pawn for the US against China. After the law kicks in, Hong Kong will play a diminishing role in the China-US competition.

Hong Kong was the US’s third largest wine export market, fourth largest market for beef products, and seventh largest market for agricultural produce.

Associate Professor Fu Fangjian of the Lee Kong Chian School of Business at Singapore Management University explained that the trade relationship between Hong Kong and the US is the opposite of mainland China. Hong Kong is the single economy that gives the US its highest trade surplus. He said, “If the US revokes Hong Kong’s preferential customs status, a lot of US goods sold to Hong Kong would have to be taxed, and US companies in Hong Kong would also suffer. That would be shooting itself in the foot.”

Figures from Hong Kong’s Trade and Industry Department show that in 2018, Hong Kong was the US’s third largest wine export market, fourth largest market for beef products, and seventh largest market for agricultural produce; that year, the US earned a trade surplus of US$31.1 billion in Hong Kong. Besides, the American Chamber of Commerce in Hong Kong has over 1,200 member companies, and there are about 85,000 US citizens living in Hong Kong, which means tightening visas would affect them.

China has realised that even if it gives way on Hong Kong, the US will always have excuses to impose sanctions. Such conclusions lead to the US being less able to check China’s policies. - Professor Wang Jiangyu, City University of Hong Kong

Wang Jiangyu, a professor at the School of Law and director of the Centre for Chinese and Comparative Law at City University of Hong Kong said, “The Trump administration is extremely mercenary. It would not break with China over Hong Kong.” He added that going by the friction between China and the US over the trade war and coronavirus, China has realised that even if it gives way on Hong Kong, the US will always have excuses to impose sanctions. Such conclusions lead to the US being less able to check China’s policies.

Professor Ma Ngok of the Department of Government and Public Administration at the Chinese University of Hong Kong sees the US as the only chance to stop the security law from being implemented, but he is not optimistic about it. He said many people hope the US will intervene, but what the US will do depends on how important Hong Kong is to Beijing. He said, “Economically, Hong Kong is an important channel for foreign funds to go in and out of China. Politically, it is an example of ‘one country, two systems’ for Taiwan. But from Beijing’s attitude, it is ready to sacrifice Hong Kong.”

However, since China joined the World Trade Organization, Hong Kong’s influence on China’s economy is not what it used to be.

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China's President Xi Jinping (top C) is shown on a large video screen in Hong Kong on May 28, 2020, during a live broadcast of the National People’s Congress (NPC) in Beijing. (Anthony Wallace/AFP)

Beijing will no longer allow Hong Kong to be a “lever” between China and the US

Hong Kong works on the capitalist system and has always been a bridge between China and the rest of the world in terms of goods and capital. However, since China joined the World Trade Organization, Hong Kong’s influence on China’s economy is not what it used to be. When Hong Kong was returned to China in 1997, its GDP was 18% of mainland China’s; that figure is now less than 3%. Last year, mainland China’s exports to Hong Kong or via Hong Kong made up 12% of its total exports — this is far lower than the 45% in 1992.

Associate Professor Fu thinks that Hong Kong is still an important channel for mainland China to open up to the rest of the world. But with mainland China’s financial markets fully opening up in April, investment banks and credit rating agencies now have direct access, and Hong Kong’s position will be weakened even more. “If Hong Kong does not actively transform itself,” he said, “it will face challenges from Singapore and other regional financial centres.”

"China’s rise cannot be turned back, which is also a sad point for the opposition camp — Hong Kong’s future is tied to China, whether or not they want it.” Chen Shaobo, Chinese Association of Hong Kong and Macao Studies and Hong Kong Insights Consultancy

Chen Shaobo of the Chinese Association of Hong Kong and Macao Studies and Hong Kong Insights Consultancy noted that China and the US used to each get what they needed from Hong Kong, but as the gap closes between both country’s powers, Hong Kong is no longer a strategic “lever”, and this strategic triangle is breaking down. Besides, in recent years, China-US relations have shifted towards competition and opposition, and Beijing will no longer allow Hong Kong to be a “lever” between China and the US.

He said, “The security law is a signal that Hong Kong has to pick a side between China and the US. Over the past few days, major financial institutions in Hong Kong have expressed support for the law, in a clear response to that signal. China’s rise cannot be turned back, which is also a sad point for the opposition camp — Hong Kong’s future is tied to China, whether or not they want it.”

Academic: China's economic development key to securing Hong Kong's future 

Over a week after a new national security law on Hong Kong was announced, protesters took to the streets again after a temporary bout of calm following the Covid-19 pandemic. Plunges in Hong Kong’s Hang Seng Index also hit the worst one-day decline in almost five years. According to news from Reuters, some mainland tycoons are worried that the new law will jeopardise their assets in Hong Kong and are considering shifting them to Singapore, Switzerland, London, and elsewhere.    

Associate Professor Fu predicts that Hong Kong would be faced with greater turbulence before the national security law is implemented. “The groups that could get arrested would definitely be putting up a fierce fight despite their treacherous plight. A short-term market volatility is also normal. It would be extremely advantageous to Hong Kong if the new law can create a long-term stable and peaceful investment environment,” he said.      

Anti-government demonstrators are detained by riot police during a protest at Causeway Bay in Hong Kong, China, on 27 May 2020. (Tyrone Siu/Reuters)
Anti-government demonstrators are detained by riot police during a protest at Causeway Bay in Hong Kong, China, on 27 May 2020. (Tyrone Siu/Reuters)

Associate Professor Fu told us that Hong Kong’s financial services are mostly targeted at Chinese companies, and brick-and-mortar businesses of most large and listed companies are on the mainland. The achievements of this international financial centre today cannot be separated from the advantage of relying on China. He said, “Capital is profit-driven. As long as China’s economy continues to develop and foreign capital continues to make profit, there is no reason why investors would turn elsewhere.”     

...following the announcement of a national security law for Hong Kong, mainland China investors are rushing to buy up Hong Kong stocks, with a net value of over US$1.5 billion of Hong Kong stocks bought to date.

According to a report from the Peterson Institute for International Economics, by the end of 2018, stock volume of China's non-financial outbound direct investment in Hong Kong reached US$622 billion (S$881.7 billion), which is equivalent to 170% of Hong Kong’s GDP in the same year. This shows that many Chinese enterprises invest worldwide via Hong Kong. Out of 96 Chinese state-owned enterprises, 50 of them have at least one subsidiary company that is listed in Hong Kong. According to statistics from Bloomberg, following the announcement of a national security law for Hong Kong, mainland China investors are rushing to buy up Hong Kong stocks, with a net value of over US$1.5 billion of Hong Kong stocks bought to date.

Riot police stand guard in front of an HSBC Holdings plc bank branch in the Central district ahead of an anticipated lunchtime protest in Hong Kong, China, on 29 May 2020. (Lam Yik/Bloomberg)
Riot police stand guard in front of an HSBC Holdings plc bank branch in the Central district ahead of an anticipated lunchtime protest in Hong Kong, China, on 29 May 2020. (Lam Yik/Bloomberg)

Professor Wang thinks that if the implementation of the national security law does not disrupt social order and the fundamentals of Hong Kong law are upheld, investors will not be too unhappy. Taking a step back, even if foreign capital were to leave Hong Kong because Hong Kongers took to non-violent and non-cooperative means in their protests, such as being on strike, it would not be the worst-case scenario as well. “The worst is like what happened last year: huge numbers of protestors taking to the streets to destroy and vandalise property, to desecrate flags, and attack mainland organisations in Hong Kong… If such a situation is not brought under control, even if Hong Kong remains an international financial centre, the central government would still regard Hong Kong as a renegade region which does not adhere to its beliefs and ideas and it would not care less if investors and Hong Kongers leave as they please,” he explained.

All things said, a national security law for Hong Kong will not be able to overturn Hong Kong’s overall situation. What truly dictates its future is the extent to which China increases its national power and international status, as well as changes in the geopolitical landscape. This Pearl of the Orient sparkled in the past due to its advantageous position managing the relations between Chinese and Western societies. But that era has passed. Whether the pearl is buried in the mud or shines brightly once more can no longer be dictated by street protestors.      

Related: Hong Kong will move into another period of unrest | Why Beijing is taking the risk to push through the national security law and rein in Hong Kong | Hong Kong’s Cinderella story ended in 1997 | Will it be 'one country, one system' for Hong Kong?