Fear of China’s growing influence in Hong Kong has sent stocks reeling and some investors are rethinking their asset allocations. But an exodus to Singapore is not a given, and the city state may not welcome one anyway.
Chris Niem, a communications consultant, was one of tens of thousands of protesters who crowded central Hong Kong to literally try and block the passage of a piece of legislation that would allow anyone in the territory to be extradited to mainland China for certain crimes.
For Niem, who wore a white shirt and face mask, this was not his first protest — he had participated in demonstrations during the Occupy Movement in 2014. But this time, his presence is part of a far more serious undertaking than the previous demonstrations, Niem says. “Extradition to China is unthinkable for the majority of Hongkongers, because we simply have no faith in the rule of law in China, and by extension, no faith in the Chinese Communist Party,” the 29-year-old says emphatically.
What started out as a peaceful protest outside Hong Kong’s Legislative Council complex early on June 12 quickly descended into chaos as police and demonstrators clashed. More than 70 people have been injured as officers fired rubber bullets and tear gas at the crowds, who hurled umbrellas, water bottles and bricks at them. Public anger has flared up at the so-called Fugitives Bill, which is viewed as China’s extensive meddling in the territory that was promised some degree of autonomy.
Since it was proposed in February, businesses, foreign and local, and civil society alike have expressed concern and downright opposition to the bill.
The main worry is the erosion of the “one country, two systems” policy formulated by China during the hand over of Hong Kong in 1997, when it vowed to let the territory operate as a special autonomous region for 50 years. “The primary concern is that this new bill will affect Hong Kong’s judicial independence,” says Tania Chin, partner at law firm Withers KhattarWong.
“It is understood that the Chief Executive, who is not elected but chosen by an election committee accountable to China, has the sole authority to decide on any extradition request. While the courts will have the opportunity to review any decision, they will have very little power to reject any extradition request because they will not be allowed to make an assessment of an accused person’s guilt or whether due process would be accorded to the accused person.”
In response to criticism, the Legislative Council amended the bill to remove nine categories of crime, leaving 37. The exempted offences include those under bankruptcy or insolvency law, certain financial crimes and some that relate to intellectual property rights and taxes.
The next reading of the bill, which was due on June 12 and up for a vote on June 20, has been postponed indefinitely. But the events are nonetheless taking their toll. The benchmark Hang Seng Index fell 1.5% on June 12, making it the worst-performing among major stock indices in the region.
While the immediate disruptions to businesses and life caused by the protests are dissipating, the bill is worrying the financial and investment community — the lifeblood of Hong Kong. Many in the sector tell The Edge Singapore that they are rethinking locating their operations and assets in Hong Kong. Some are considering shifting people and assets out of the city, while others are preparing for the possibility that their Hong Kong operations will be under greater scrutiny from China.
“The long-term impact [and implementation of the bill] are what matter. There has been concern about Chinese influence for a while now. The companies won’t move out immediately, but they would be a lot more cautious because you are no longer safe in Hong Kong,” says Alfred Wu, associate professor of the Lee Kuan Yew School of Public Policy at the National University of Singapore. “[Business owners] need to toe the line of the Communist Party of China more closely. Otherwise, they [could] be arrested in Hong Kong in the future. For example, in the past, many business owners [allegedly] bribed public officials in China.”
Flight of assets?
Immediately after protests against the bill broke out, pundits speculated that businesses and investors would seek a safe haven — in Singapore.
Singapore and Hong Kong have been long-time international financial centre rivals. Their common features are their openness to trade and strong rule of law, with a judicial system that Western business people are familiar and comfortable with. The extradition bill is undermining confidence in that adherence to international legal standards and rattling investors’ confidence in the security of their assets in Hong Kong. The Edge Singapore understands that many mainland Chinese investors are now looking to move their money and assets out of Hong Kong and many of them are considering Singapore.
“Investors are worried because they have [banked on] the sanctity of common law. To the extent that [the bill] erodes it, that raises questions whether we would want to maintain our investments [in Hong Kong] for the long term,” says an investment consultant based in Hong Kong who only wants to be known as Lucas.
“I think the people most likely to move their assets from Singapore are actually mainland investors looking for a safe haven for their investments,” says Stephan Ortmann, assistant professor of politics at City University of Hong Kong (CUHK). “If the Hong Kong dollar is seriously affected, money could flow out to Singapore, strengthening the Singapore dollar.”
However, it is less straightforward for MNCs, many of which have had their regional headquarters in Hong Kong for a long time.
“I think the fear about companies relocating is overblown. Relocation will be expensive,” says Pang Kam Wing, a compliance director and in-house legal counsel based in Hong Kong. “Many manufacturing businesses have factories in China. Is Singapore a viable alternative? I think so. But for those companies that have businesses in China, it may just be too far. Unless they already have bases set up in Singapore, I don’t see that this bill will make them get up and leave — unless something drastic happens. If there is a definite loss of market confidence in Hong Kong as a direct result of this bill, then the business community may push for it to be repealed.”
He notes that business interests are very well represented in the Legislative Council. “It’s all about making money here. Countries may precondition any talks of business in Hong Kong with guarantees that their citizens are not subject to the extradition laws in Hong Kong.”
The end of an exceptional case
The biggest risk, if the extradition bill goes through, is that Hong Kong would no longer be seen as a legal entity separate from mainland China.
The US has threatened to suspend the US-Hong Kong Policy Act of 1992. The act establishes the legal framework to accord Hong Kong special treatment apart from the rest of China, in matters of trade, for example. Without it, Hong Kong would be subject to the various US regulations that other Chinese cities are subject to, which would hurt trades and credit lines for companies in Hong Kong.
Indeed, on June 11, the Speaker of the US House of Representatives, Nancy Pelosi, issued a statement condemning the bill. “If it passes, Congress has no choice but to reassess whether Hong Kong is ‘sufficiently autonomous’ under the ‘one country, two systems’ framework,” she said.
The US is unlikely to be the only country withdrawing Hong Kong’s special privileges. The UK and Germany are keeping an eye on the proceedings. Germany in particular recently gave two of Hong Kong’s Umbrella Movement leaders political asylum, refusing extradition requests from the Hong Kong government.
“What happens if the bill gets passed is that some of those concerns that have plagued businesses in China will now apply in Hong Kong,” says Chong Ja Ian,
associate professor of political science at the National University of Singapore, referring to incidents such as the recent arrest of Canadian businessman Michael Spavor, allegedly in retaliation for the arrest of Huawei’s chief financial officer Meng Wanzhou in Vancouver.
“As Hong Kong’s separate system is eroded, businesses may not see the use of Hong Kong — which boasts some of the highest rents for office space — and relocate elsewhere,” says CUHK’s Ortmann.
“One of the big areas to worry about is that the way the Chinese legal system works is fairly opaque and strong, as well as insufficient independence of the judiciary. So, compared with the past, the political pressure that Hong Kong has been insulated from becomes far more direct for the businesses,” NUS’s Chong notes.
The anxiety felt by the people in Hong Kong is unlike anything before, say observers, including during the 1997 handover. Hong Kong, one international lawyer notes, has an inherent insecurity about itself and its future amid China’s growing assertiveness. “The more desperate the people of Hong Kong get and the more entrenched the Hong Kong government feels it needs to be, the worse it will be for the territory down the road,” the lawyer says. “That’s ironically how foreign sentiment will be affected gradually over a period of time. And it won’t just be about the extradition bill.”
Not all good for Singapore
Singapore may be the obvious and convenient choice for businesses looking to relocate from Hong Kong. The city state provides similar business-friendly regulations and taxes, public infrastructure and other amenities. And it already has a robust business ecosystem of lawyers, investment managers and other service providers.
“Singapore has a strong reputation as a seat for arbitration. It has also in recent years set up the Singapore International Commercial Court. Again, these features make Singapore an attractive option,” says Withers KhattarWong partner Sashi Nathan.
Even as the perceived rivalry between Singapore and Hong Kong continues, one senior risk analyst says it was naive of Hongkongers and many others to think that nothing would change after the handover until 2046. Apart from the legal issues at play currently, there are concerns about data security, among other things.
To that end, there has already been a gradual shift in how business owners, investors and their money managers allocate resources. Hong Kong has become a base for China-focused operations and funds, while Singapore will be the base for Asian businesses that have no exposure to China. In fact, as businesses and fund managers determine that their operations have any China risk, they may as well base themselves in a Chinese city instead. Hong Kong’s standing as Asia’s financial hub is already facing fierce competition from major Chinese cities such as Shanghai and Shenzhen, says Rajiv Biswas, executive director and chief economist of Asia-Pacific, IHS Markit. The extradition bill, if passed, would only be another reason to skip the port city.
Still, Hong Kong is likely to maintain its supremacy as a hub for capital raising, particularly for Chinese companies. There is significant market interest in the city and a big pool of funds, backed by a high national savings rate — one observer quips that buying IPOs is a national pastime.
Indeed, in an apparent dismissal of current events, Alibaba Group Holding, already listed in New York, filed for a Hong Kong IPO the same week. It could raise as much as US$20 billion ($27.3 billion), making it the city’s biggest share sale since AIA Group in 2010.
And, there are some who may shy away from Singapore as a base, according to NUS’s Chong. “If your business happens to be in media, Singapore’s own increasing restrictions in these areas might discourage these businesses from coming to Singapore,” he says.
Meanwhile, Chong cautions that the influx of assets and businesses from Hong Kong could come with its own set of problems. Singapore could end up being caught in the middle if China requests for the extradition for individuals residing or transiting in Singapore, for instance. While there is no extradition treaty between Singapore and China, Singapore might have to start dealing with Chinese pressure and risk having extradition politicised.
“The question will be how Singapore faces such pressure. Because if it is unclear how these people violated any law and it seems like a politicised exercise, then Singapore has to deal with the risk of its own system being politicised by China’s policies,” says NUS’s Chong. “When we have more businesses relocating to Singapore, as the US-China tensions get worse, there will be an uncomfortable situation that Singapore has to ask itself: To what extent does it comply with demands from one side or the other? That sets up a potentially trickier situation for Singapore to navigate.”
What the proposed bill is about
Tens of thousands of people in Hong Kong are up in arms over a bill that will allow China to extradite anyone to the mainland to stand trial. This could put the 7.5 million residents in the Special Adminstrative Region, including employees in more than 1,400 MNCs, at risk if they are wanted in China.
The debate on the bill has been postponed indefinitely in the wake of the protests last week, but a vote on the bill is scheduled for June 20. The bill is expected to be passed, as pro-Beijing lawmakers hold 43 out of 70 seats in the Legislative Council, though the pro-democracy Civic Party says the vote might be delayed.
The Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation (Amendment) Bill 2019 was first proposed in February this year. If passed, it would allow authorities from countries that do not have an extradition treaty with Hong Kong to make a request for criminal suspects. These countries include China, Taiwan and Macau. Hong Kong has extradition agreements with 20 countries, including Singapore.
Hong Kong’s government sees the move as plugging a loophole to prevent criminals from the mainland from seeking refuge in Hong Kong. But, sweeping amendments in the bill will reduce the level of scrutiny and simplify the extradition process, say critics. Under the proposed law, the Chief Executive has sole discretion in the final review of the case and does not need to consult the Legislative Council.
The bill was proposed after a Hong Kong man allegedly murdered his pregnant girlfriend in Taiwan last year and could not be extradited to Taiwan to face charges, as he had returned to Hong Kong.
The Hong Kong government has insisted that the decision to enact the law was not made under influence from Beijing. Some concessions have been made by the Hong Kong government even as many argue that they are insufficient. Those who commit certain financial and tax offences, as well as political and religious crimes, will not be subject to extradition. The bill also applies only to fugitives whose crimes carry a maximum sentence of at least seven years.
The bill has faced opposition from lawyers, business groups, including foreign ones, and students — with some arguing that the move will damage Hong Kong’s reputation as a financial centre. Abroad, the US, UK and Canada have voiced their concern that the bill erodes Hong Kong’s autonomy.
There has been growing concern over what appears to be increased meddling by China in the semi-autonomous territory’s affairs in recent years. The fear is that the bill gives China greater control over Hong Kong, despite the guarantee of autonomy under the 1997 handover agreement.
Hongkongers are worried that anyone critical of China could be extradited to the mainland, and that the Chief Executive would be unable to stop that. In 2016, a Chinese billionaire was taken by mainland police and has not been seen again. Five booksellers, known to be critical of Chinese leaders, have also disappeared.
Although voting on the bill has been postponed until June 20, there is no sign that the Hong Kong government is likely to scrap the proposed law.
This article was first published in Issue 886 of The Edge Singapore on 17 June 2019.