01 April 2024, NIICE Commentary 9013
Thirtha Manoj
Hong Kong is known as an absolute powerhouse for businesses worldwide. But very recently, Hong Kong passed a new national security law on 19th March 2024, which covers things like treason, spying, outside influence, keeping government secrets, and stirring up rebellion. Since then the businesses operating in Hong Kong are worried that this new law will make it even harder for Hong Kong to keep its freedoms. They think it’s a threat to the city’s autonomy and rights.
What made Hong Kong an Irresistible Destination for Businesses Worldwide?
One is its strategic location. Situated at the heart of Asia, Hong Kong serves as a gateway to not only the massive Chinese market but also to the booming economies of India and the Asia-Pacific region at large.
Second is the ease of doing business it offers. According to the 2023 Economic Freedom of the World Annual Report, Hong Kong ranks second in economic freedom worldwide, just behind Canada. This makes it a hotspot for entrepreneurs looking to make their mark on the world.
Third is its appealing tax system. In Hong Kong, the tax system is very straightforward. It has just three direct taxes: profits tax for businesses, salaries tax for personal income, and property tax for local property earnings.
In Hong Kong, there are no turnover taxes like sales or value-added tax. That means you can move profits around and manage invoices without the hassle of additional taxes eating into your earnings. And also, Hong Kong’s tax system is based on territory. That means only the income earned within the city is taxed, that means, whether you’re a resident or not, if you’re earning money abroad, you won’t be taxed in Hong Kong, even if you bring that money back.
However, when you’re doing business in the city, Hong Kong has a special tax system. Instead of taxing all profits at the same rate, they use a two-tier system. This means the first HK$2 million of profits are taxed at a lower rate of 8.25%, while any profits above that are taxed at the standard rate of 16.5%. This setup is especially good for small and medium-sized businesses (SMEs) in Hong Kong. By taxing the first HK$2 million of profits at a lower rate, the government is giving SMEs more money to use for growing their businesses, hiring more people, and expanding.
And fourth is its flexible immigration policy. Hong Kong has a liberal immigration policy that allows citizens of about 170 countries and territories to visit visa-free for 7–180 days for business, social, or pleasure. There are no strict restrictions for foreign individuals looking to work or study in the territory. All you need is a visa, and there are various categories to choose from, whether you’re coming for employment, investment, or to join a family member. So, all these make Hong Kong a safe haven for businesses worldwide.
What Changed?
The problem is Hong Kong’s new national security law. Back in 2020, big changes happened in Hong Kong when China made a new law called the National Security Law (NSL). This law came after people protested in Hong Kong in 2019 against a plan to send people from Hong Kong to China for trials. According to the “one country, two systems” idea, Hong Kong’s leaders must follow what China says, especially about national security. So, they had no option, but to agree and said that this law is needed to keep things stable and won’t take away Hong Kong’s freedom. They passed this law on 19th March 2024 with a few alterations.
So, What is this Law all about?
This national security law (NSL) in Hong Kong makes certain actions illegal if they’re seen as a threat to China’s stability and control. These actions include trying to separate from China (secession), working against the government’s power (subversion), using violence or threats against people or the government (terrorism), and teaming up with foreign groups to harm China’s security (collusion). People who are found guilty of these crimes can face up to life in prison.
Concerns of Business Houses
People see this law as broader than a national security law. They see this as a way to transplant mainland China’s national security standards into Hong Kong’s legal framework. While this move is justified to ensure consistent national security standards across the country by the government, critics express concerns that this would erode human rights and freedom enjoyed by the people in Hong Kong.
Another main point to note is that this law also includes the new offence of “external interference”. That means overseas organisations and their local affiliates that are seen as a threat to national security can be prohibited from operating in the city. However, it is important to note that what constitutes an external organisation is unclear and what actions are seen as a threat to national security is also not given. So, these vaguely defined provisions leave civil groups, international NGOs and business groups operating in Hong Kong unsure of their future in the city.
Business Implications of New National Security Law
The law gives the chief executive of Hong Kong the power to directly ban organisations and companies that are found working for foreign forces. There are many vague provisions, for example, what these “foreign forces” are is not clearly defined and this raises ambiguity. Ambiguity is a big risk for business in Hong Kong. After all, why would any business want to remain in the shadow of risk?
This law takes away all the freedom and empowers Beijing which will allow China to exert its influence on business operations in Hong Kong. Companies might refrain from certain activities in the future because they find it harder to see how the city is different from the rest of China. And this has impacted the city’s reputation as a global financial hub and made it less attractive for international business.
This has resulted in tens of billions leaving the city. According to a report from Morgan Stanley’s research team on January 2, 2024, a total of 3.8 billion dollars was withdrawn from global investment funds that focus on the Chinese and Hong Kong stock markets. Of this amount, two billion dollars were pulled out by investors selling their shares.
Lessons to be Learnt
The story of Hong Kong illustrates how a lack of clear provisions and a long-term vision in a single policy can jeopardize the prosperity of a well-established economic powerhouse like Hong Kong. While Hong Kong aims to emulate China and align itself with its objectives, there’s uncertainty regarding whether mimicking China’s policies will guarantee success for Hong Kong. Each country or region possesses unique strategic advantages and policies that contribute to its global appeal. Sustainable success hinges on preserving these inherent strengths rather than adopting policies from elsewhere. So, regardless of a region’s strategic significance or superior infrastructure, a single misguided policy has the potential to undermine its stability and prosperity.
Thirtha Manoj is a postgraduate in politics and international relations from Central University of Gujarat, India.
