Hong Kong’s future will now be made in China

Hong Kong will never be the same again. 

With the passing of a national security law in Beijing on Tuesday that will overrule its cherished autonomy, a city often defined by its differences with China is starting to look increasingly like part of the mainland. New crimes will be introduced allowing life sentences for acts of secession, subversion, terrorism, and collusion with external forces, alongside a national security coordination office and special panels of judges.

Quietly, Hong Kong has already been changing. Some 29,200 residents left last year, the largest outflow since 2012. Money, too, has been retreating. Foreign direct investment inflows, for so long the lifeblood of the city, fell 34% last year. That figure if anything understates how bad things are: If you exclude the reinvestment of earnings from already-established branch offices, foreign businesses actually sold out of the city in aggregate last year, according to a report last month by the U.N. Conference on Trade and Development.

In a survey of members by Hong Kong's American Chamber of Commerce last month, 60% thought the national security law would harm their businesses and 29% said they were considering relocating away from the city. Just 15% said they were optimistic about Hong Kong's prospects.

Beijing has a solution for that. If foreign capital is looking at the exits, there's plenty of Chinese money ready to take its place. Regulators this week started official work on a "wealth management connect" that will allow mainlanders in nearby metropolitan areas to invest in financial products in Hong Kong. The program will echo connections set up in recent years for equity and bond investments.

Given the way China has grown in recent decades, it's hardly surprising that Beijing sees an ever-closer alignment as the best outcome for Hong Kong. Back in the 1990s, its economy was 27% the size of the mainland's. Now it's less than 3%. "The motherland offers Hong Kong the strongest backing," in the words of Luo Haining, Beijing's liaison chief.

Such a comparison, though, misses a crucial fact about the relationship between the two economies: For decades, Hong Kong has had outsize importance to China; it's not just another city. Even Mao Zedong appears to have recognized this, refraining from invasion in 1949 and turning the place into a conduit for raising much-needed foreign currency in exchange for grain exports in the 1950s and 1960s.

Its status has only grown in the years since. Hong Kong accounted for 65% of China's inward foreign direct investment and 61% of its outward FDI in 2018. It's still home to 72% of offshore yuan payments and 30% of global over-the-counter yuan transactions.

For all China's scale, the country has rarely accounted for more than about half of foreign investments in Hong Kong. That leaves a yawning potential gap if the legal changes now under way cause its international connections to wither. While foreign businesses may keep a foothold in the city, they may spread out their Asian operations. The attractions of running your South Korean or Taiwanese business from an office under Beijing's jurisdiction will be diminished.

The city is still home to more than 1,300 US firms and 85,000 US citizens. Many are understandably worried. The predictability of government policies and legal protection has deteriorated. Rather than bringing stability to a Hong Kong that's been hit by protests in the past year, Beijing's national security law has increased uncertainty.

The result will eventually be less an international financial center than a Chinese one. The 23% of the labor force working in financial services, long over-represented in Hong Kong's public image, will doubtless benefit from the wealth management connect. The majority — including many of the younger and working-class people so active in protesting China's growing authority — will gain nothing.

A Hong Kong that's heavily dependent on the motherland will have a hard time serving as a bridge between east and west. If international capital flees it's not clear that mainland money will ever be sufficient to make up the shortfall — not least because the national security law reduces the traditional attraction of Hong Kong as a place for Chinese people to stash their wealth out of Beijing's reach. A city that aspires to sit aside New York and London will end up looking increasingly like a Zurich, or Bermuda, or Singapore.

What has made Hong Kong unique for nearly two centuries has been its role as a trading post, directing goods and capital to and from the mainland of China and around the region and collecting a toll each time. Increasingly, it's likely to turn into something more like a bank vault under the watchful eye of Beijing. Hong Kong's days as a capital of capital are fading.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.