A series of intense pro-democracy protests took Hong Kong by storm in the latter half of 2019 following the introduction of an extradition law that enables China to extradite criminals convicted in Hong Kong. The protests left the city in a state of chaos and turmoil, and since then, the city seems to be increasingly defined by its instability. With Covid-19 and the National Security Law, introduced to suppress dissent in response to the 2019 protests, international firms and investors alike are steadily turning their attention away from this once illustrious economic powerhouse, leaving Hong Kong’s future as Asia’s leading financial hub in limbo. In fact, careful examination of Hong Kong’s current political landscape and global market trends all seem to suggest that Hong Kong’s days as a unique economic powerhouse might be numbered.
Hong Kong has enjoyed a high degree of economic success in no small part due to the unique rule of law and economic advantages afforded to it by the “One Country, Two Systems” dynamic, effectively allowing Hong Kong to operate under its own judicial, economic, and tax system independent of China. Additionally, Hong Kong’s ability to act as an effective conduit between the world and China has contributed significantly to its reputation as one of the world’s most attractive markets. Hong Kong is a prime destination for foreign direct investment (FDI) into China due to its laissez-faire economy and transparent rule of law that contrast with the restrictive financial interventions opaque judicial system and of the mainland government; over 60 percent of China’s FDI was channeled through Hong Kong in 2018. In essence, the political stability that once presided over Hong Kong has enabled its rise as Asia’s premiere economic hub. However, recent changes to the city’s political landscape and the ensuing political instability may signal the beginning of her fall from grace.
Hong Kong’s anti-extradition movement dealt a heavy blow to the city’s economy. Civil unrest that extended from the streets to the Hong Kong legislature initially left investors and businesses rattled, but the extradition law also foreshadowed the decay in Hong Kong’s judicial independence and transparency, further driving investors away from the city. In the aftermath of the protests, Hong Kong entered a recession for the first time in a decade. Beyond the short-term detriment to Hong Kong’s economy, the protests in 2019 signalled worsening relations with mainland China and reinforced the city’s increasing political instability. Both this judicial decay and the ensuing political instability reduced confidence in the city’s ability to sustain its role as an economic hub, driving potential investors away and causing current set-up firms to consider alternatives.
Beyond the 2019 protests, confidence in Hong Kong further declined following the introduction of the National Security Law in 2020, which contained two crucial articles that further impacted investor confidence. Article 43 of the National Security Law grants Hong Kong police much broader investigatory powers, significantly reducing the barriers to information seizure, and Article 31 indicates that international firms could be prosecuted as a threat to national security. These laws increase risk for international firms doing business in Hong Kong, significantly reducing the appeal of future investment. Additionally, the National Security Law initiated the collapse of a number of Hong Kong’s media outlets, causing the Biden administration to issue an advisory on the risks and considerations for businesses operating in Hong Kong. This law sought to penalize Hong Kong’s government for infringing on the civil liberties of its citizens, as well as caution US businesses operating within Hong Kong. As a result, international businesses were further forced to reconsider their future in Hong Kong and began seeking alternatives to the economic hub: A US Chamber of Commerce survey found that 26 percent of companies surveyed are considering relocating out of the city to more stable locations such as Singapore.
Hong Kong’s stringent Covid-19 policies dealt another blow to the reputation of the city’s market. Hong Kong’s zero-tolerance mindset towards the pandemic led to a three-week quarantine period, one of the longest in the world, that left residents and expatriates either stranded outside of Hong Kong or forced to bear the heavy cost of quarantine. These stiff laws have encouraged residents of the city to relocate; the Hong Kong census indicated a population decrease of 87,100 people in 2021 alone. On top of residents leaving, over 40 percent of surveyed expatriates in Hong Kong are considering leaving the city as well. The mass exodus that Hong Kong currently faces is indicative of a shrinking talent pool, further reducing Hong Kong’s attractiveness as a destination for businesses to set up in the long run.
The multitude of political obstacles that Hong Kong now faces and the mass exodus of its citizens has left the city’s status as an international hub in a more precarious state than ever before. Although Hong Kong has shown some steady progress in weathering the political storm in which it finds itself—reflected in a rebound in FDI by more than 60 percent in 2020—businesses have already begun to look for alternatives in Singapore or Hainan as the “second Hong Kong.” Major banks such as Bank of America and Citigroup have taken steps to relocate staff from Hong Kong to Singapore. Hainan has become mainland China’s next big project, with ongoing efforts to transform the island into the next central, free trade port. Low duties on foreign goods, relaxed regulations on foreign capital, and low taxes have all been introduced in an effort to make Hainan stand apart from China’s other free trade zones and to attract businesses and investors to the island. The appeal of these other destinations has served to impede Hong Kong’s full economic recovery.
While it is true that Hong Kong’s pre-existing infrastructure still makes it an invaluable asset to the global economy, the undeniable trend points toward investors and businesses moving on from Hong Kong in favour of alternatives that are either more stable politically or more readily embraced by mainland China. This, in tandem with the sustained loss of confidence in the city since 2019, points firmly to the conclusion that Hong Kong’s days as Asia’s premiere economic hub are numbered.