The Fallout From China’s Hong Kong Power Play

In a surprise move last week, the Chinese Communist Party (CCP) announced plans to impose a controversial national security law in Hong Kong. The CCP’s decision follows months of unrest in the special administrative region and casts doubt on China’s willingness to abide by the “one country, two systems” model that protects Hong Kong’s special economic status. The CCP’s declaration highlights Chinese President Xi Jinping’s desire to project strength following his botched response to the COVID-19 pandemic and to use the crisis as an opportunity to realize China’s global ambitions.

First introduced in 2019, the Chinese draft law would permit the extradition to mainland China of individuals wanted for crimes perceived as endangering national security. The legislation was met with widespread opposition, resulting in prolonged protests and a landslide victory by pro-democracy parties during Hong Kong’s 2019 district council elections. At the time, the CCP appeared to beat a reluctant retreat.

The CCP’s decision to resubmit the law during last week’s annual meeting of the National People’s Congress (NPC), China’s most important political convention, reflects Beijing’s desire to prevent similar protests in the future. The NPC will vote on the law in late May, after which the NPC’s Standing Committee, China’s top legislative body, will finalize passage in June. Though international reaction to the announcement has been muted, the U.S. government has made it clear that Hong Kong’s special status, as enshrined in U.S. law, is based on the enclave’s high degree of autonomy and respect for human rights. It is this special status that has allowed Hong Kong to remain one of the world’s most influential financial centers.

That status is now in doubt. The bill’s passage could lead to steep drops in Hong Kong’s stock market. This could prompt capital flight from Hong Kong to Asia’s other financial powerhouse, Singapore, thereby reshaping the region’s financial landscape and potentially weakening China’s economy further amidst a sizeable economic downturn.

Beijing’s decision to advance the law is part of a broader effort to project strength following the COVID-19 crisis, and suggests Xi believes the risks stemming from future unrest in Hong Kong outweigh the sizeable economic benefits afforded by its special status. The move also suggests Xi intends to exploit the global disorder stemming from the pandemic to neutralize threats to his authority. This may portend further aggressive action against other irritants, namely Taiwan.

With the bill all but certain to pass, pro-democracy activists, foreign diplomats, journalists, and business leaders will find themselves subject to increased surveillance, harassment, and arbitrary detention. Activists are already organizing protests in an attempt to frustrate Beijing, although these groups will likely be forced underground following the law’s passage – but not before attracting widespread international condemnation.

Amidst a global health crisis, the U.S. government’s options are largely limited to symbolic gestures such as a presidential statement supporting the protesters and efforts to reevaluate Hong Kong’s special status. President Donald Trump will likely refrain from wading too deeply into the crisis in order to preserve his relationship with Xi, and likely will instead task Secretary of State Mike Pompeo to be the face of the U.S. response. China hawks in Congress will work to increase bipartisan pressure on Beijing by advancing legislation to delist Chinese companies from the U.S. stock market and/or sanction Chinese actors involved in crackdowns in Hong Kong.

Lastly, banks and businesses will begin evaluating plans to shift resources and personnel to Singapore or other regional hubs. Not wanting to draw Beijing’s ire, most companies will proceed cautiously as they monitor Beijing’s next moves. But such measures may ultimately be inevitable.

Craig Singleton, a former U.S. diplomat and national security expert, is an adjunct fellow at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Military and Political Power (CMPP) and Center on Economic and Financial Power (CEFP). For more analysis from Craig, CMPP, and CEFP, please subscribe HERE. Follow FDD on Twitter @FDD and @FDD_CMPP and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.