Here in Hong Kong, we have long been able to say we are the most competitive economy in the world. Generally, we have enjoyed a friendly rivalry with Singapore as we jostle for the top spot in international rankings.

But last month, that changed. The latest World Competitiveness Ranking from the International Institute for Management (IMD) ranked Hong Kong in fifth place, down from second spot in its 2019 report. The survey was based on data from 2019 and early 2020, so did not include the coronavirus outbreak.

In its introduction to the survey, IMD said: “While Hong Kong SAR came in at fifth, this is a far cry from second, which it enjoyed last year. The decline can be attributed to a decline in its economic performance, social turmoil in Hong Kong as well as the rub-on effect of the Chinese economy.” 

The National Security law announced during the Two Sessions in Beijing at the end of May aims to restore stability to Hong Kong after the violent protests of last year. However, this law, which was promulgated on 30 June, has also raised some concerns in about what it means for Hong Kong’s high degree of autonomy under One Country, Two Systems, which have long underpinned the city’s success. 

Impact of the protests

Last year’s protests inflicted enormous damage on local businesses, from smashed-up shops and restaurants to cancelled events and plummeting tourism. Hong Kong’s SMEs have been among the most severely affected. Skincare company JaneClare had been enjoying strong annual growth in sales locally, but that screeched to an abrupt halt when the social unrest flared up. 

“Last year, our local sales not only stopped growing for the first time, they even dropped by around 30%,” lamented Angela Lee, Chairman of Laboratory JaneClare Limited. 

Sales figures are only part of the story. Lee said that a number of potential overseas distributors had cancelled planned visits to Hong Kong amid the unrest, and it also impacted the reputation of Hong Kong brands.

“The high regard for made-in-Hong Kong products in the eyes of Mainland consumers apparently has also suffered because of the animosity that some rioters blatantly demonstrated towards Mainlanders,” she added. 

Thomas Su, Managing Director of the Wessen Group, which sells personal care and baby products, among others, had a similar experience.

“The protests reduced the numbers of Chinese buyers to Hong Kong and shortened business operating hours – especially the Baby Expo at HKCEC – leading to a reduction in consumer spending, which caused our sales to drop in general.”

Indeed, Hong Kong’s trade and exhibitions were badly hit, with many events operating shorter hours, or needing to cancel altogether amid disruption and overseas visitors being unwilling to visit the city. 

Need for stability

The protests largely disappeared as the Covid-19 pandemic emerged. Hong Kong has managed to keep the spread of the virus under control, thanks to the rapid action of the Government and the united efforts of Hong Kong people. However, the easing of social distancing restrictions has been accompanied by a return of some incidences of social unrest. 

With many businesses teetering on the brink of bankruptcy, and many employees facing reduced salaries or redundancy, continued unrest could be the final nail in their coffin. Consequently, businesses hope that the new law will help to avoid a resurgence of the disruption and violence. 

Most jurisdictions around the world – including Singapore – have their own national security laws, so Hong Kong not having such a law in place left it vulnerable. Su said he hopes, “This national security law may reduce the protests, and we also hope the law will encourage the return of Chinese travellers to Hong Kong.” 

A majority of Chamber members (61%) who responded to a survey on the possible impact of a national security law, said that they expected the law would have a positive or no impact over the long-term on the hope of restoring social order and a peaceful business environment, although 54% were concerned about the impact in the short term mainly due to uncertainty in the absence of details of the law (See box for more details).

“When we see the social disruption rearing its ugly head again when the coronavirus threat is hardly over, the announcement of the national security law actually offers some hope that stability could return,” said JaneClare’s Lee.

Concerns and controversy

The announcement of the new law has not been without controversy and some commentators have suggested that it will cause capital, businesses and talent to leave the city. However, as Chamber CEO George Leung pointed out, this has not happened.

“Firstly, there has been no evidence to date of capital flow or businesses exiting Hong Kong,” he said. “I think it is unlikely that global companies will seek to replace Hong Kong as their hub in Asia, as the city has unrivalled benefits in banking, rule of law, location and talent to support business operations across the whole of China and the Asia Pacific.”

Some other key questions are around the new law’s impact on Hong Kong’s freedoms and how it fits with the laws already governing the city. 

Nick Chan, partner at international law firm Squire Patton Boggs, noted that the stated goal of the new law was to strengthen “One Country, Two Systems” and that it is consistent with the Constitution and the Basic Law.

“It is the world norm for a nation’s highest legislative body to legislate on matters of national security,” he said. “The United States has about 20 national security related laws, and most jurisdictions around the world have some form of local laws to protect national security.”

It is widely anticipated that the NPC’s decision will help curb violence and threats against national security, and in doing so it will help strengthen “One Country, Two Systems,“ Chan added.

Speaking at the Chamber’s webinar on the Two Session meetings in Beijing, Anthony Wu, member of the Standing Committee of the CPPCC National Committee, noted that 23 years had passed without Hong Kong enacting its own national security law, as required under the Basic Law.

“After the events of last year, I think everyone can clearly see the loophole in our legal system in protecting national security,” he said. “In all of the meetings we had with various leaders [at the Two Sessions], the message was loud and clear that this is not the end of ‘One Country, Two Systems’ – it is meant to promote and enhance the future of ‘One Country Two Systems’.”

Some commentators have said that they worry that Hong Kong will become just another Mainland city. But JaneClare’s Lee made the point that the Central Government does not need a Hong Kong which is stripped of its uniqueness that is provided by “One Country, Two Systems.” “In that respect, the interests of the Mainland and Hong Kong are aligned.”

Officials in Hong Kong and Beijing have said that it will not mean any loss of Hong Kong’s autonomy, and emphasized that the law will apply only to the most serious crimes – secession, subversion, terrorism and collusion with foreign parties – that threaten the security of the nation.

Global perception

However, many overseas government officials and business representatives in Hong Kong have expressed their concerns about the law. As the terms of the national security law are quite broad, there remains a lack of clarity about exactly what activities will be covered, and how the law will be interpreted and implemented. Some businesses in the city are concerned that they may inadvertently break the law without realising it. 

Some overseas governments have also voiced their objections, and some are considering action in response. The United States, in particular, is moving towards sanctions including removing Hong Kong’s “most-favoured nation” status, which would mean higher tariffs on exports. In practice, this would not have a huge impact on the Hong Kong economy, as only around 1% of our exports are actually manufactured here.

But the negative sentiment and uncertainty threatens to be far more damaging. Despite the fact that the new National Security law is not intended to impact Hong Kong’s freedoms, speculation that Beijing is trying to increase its control on Hong Kong could still hurt the city.

Stephen Olson, Research Fellow at the Hinrich Foundation and an expert on global trade, said that Hong Kong’s benefits remain, although the city could still be impacted. 

“Anything that diminishes, either in perception or reality, the quality of Hong Kong’s rule of law would not be helpful for Hong Kong’s standing as an international trade and business hub,” Olson said. 

“At the same time, however, Hong Kong continues to retain many of the compelling advantages which has made Hong Kong a leading business centre for decades.”

Hong Kong has successfully prevented the spread of Covid-19, and we have started to see a return to normal for some business sectors. However, as the Chamber’s CEO pointed out, the threat from unrest could derail any recovery. 

“The damage caused to our economy by the coronavirus and months of protest mean that we have a tough road ahead,” Leung said. “Stability is essential for businesses to plan for the future, and we also need to rebuild Hong Kong’s reputation as one of the safest, freest and most open cities in the world. We can only accomplish that if we all work together.”