Time to Skip Town?: Hong Kong loses special treatment from the US

July 24, 2020

2 min read

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What's going on here?

In response to mainland China’s passing of the National Security Act in Hong Kong, US President Donald Trump has signed an executive order ending the preferential treatment the city once enjoyed.

What does this mean?

The National Security Act recently passed in Hong Kong prohibits acts of “treason, secession, sedition, subversion against the central people’s government, or theft of state secrets…”. When the UK, Hong Kong’s ex-colonial power, handed the city back over to China in 1997, they agreed that the region would adopt a “one country, two systems” framework. This provides the city with greater autonomy than its mainland counterpart, with freedoms including a separate legal and economic structure from the mainland, self-governance, and limited electoral rights. Therefore, with the new national security law comes concerns that the city’s precarious freedoms may be in jeopardy. 

President Trump has addressed these matters by noting that the city will now receive “no special privileges, no special economic treatment and no export of sensitive technologies”. Consequently, many businesses with headquarters in Hong Kong may have to re-evaluate their business operations. Hong Kong, a tax haven, has long been an attractive place for business; there is no sales tax or capital gains tax, and corporations pay tax at a rate of 8.25% or 16.5%, depending on profit levels, versus 21% in America or 19% in the UK. Individuals pay an income tax between 2% to 17% whereas US citizens pay up to 37%.

What's the big picture effect?

The future of American firms in Hong Kong is uncertain. The American Chamber of Commerce in Hong Kong noted that out of 180 US companies in the city, 53.5% were “very concerned” while 30.0% were “moderately concerned” about the controversial legislation. Further, while 60% of American firms are worried about the adverse impact of the law to their business operations, 70.6% do not have plans to move their capital, assets or business operations out of the city. Nonetheless, the New York Times has recently made the decision to transfer its digital editing team to Seoul over press freedom fears.

While these concerns are indeed valid, prominent businessman and former lawmaker James Tien Pei-chin mentioned that foreign business groups “would like to wait and see enforcement details first before making any contingency plans”. Some professionals, such as lawyers, are raising concerns that information of their clients’ may be seized on suspicion of breaching this law. Nonetheless, he believes the city still has “the banking, rule of law and talent…”. He adds, “if these companies skip Hong Kong…, they will still be under the mainland’s national security law which is more restrictive…Unless a company wants to completely cut off any China operations, I do not see why they need to…move”. 

Several factors support this. As one of the largest financial centres, the city’s stock market is valued at HK$37.9tn (£3.9tn) as of the end of June. Its structural benefits, including its low tax rate and strategic geographical location, also remain relevant factors. 

While the human cost of this law has become immediately apparent in recent protests, businesses are well-advised to wait to see how enforcement of this legislation will play out.

Report written by Robyn Ma

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