China Worries Foreign Investors By Announcing Plans for New Hong Kong Laws

• Author: Jacob Greene
• Posted: 2024-08-03

For those who invest in foreign markets, all the turmoil in China and Hong Kong lately has been a reason for concern. Though things seemed to be calming down, China has recently announced some new regulations that have caused the markets to tumble.

Beijing Announces Concerning Anti-Sanctions Law Against Hong Kong

Hong Kong has always operated autonomously, since it has more freedom than other Chinese territories. Due to its unique position, this has made the bustling city one of the largest financial centers of the world. However, it has also caused a lot of turmoil and uncertainty.

Many businesses with large departments in Hong Kong are technically part of nations that have implemented sanctions against China due to concerns about potential Uighar genocide and other human rights abuses. In response, China recently made it illegal for foreign entities operating in China to follow any "discriminatory" behavior like sanctions.

The law says that no person or entity in the country can help any other nation implement financial sanctions against China. Those who break this law may have their assets frozen, be deported, or have visas denied. This week, The National People's Congress met in China's capital to discuss extending this new law to Hong Kong as well. The measure is expected to pass fairly soon. If it does, Hong Kong will have to follow the anti-sanctions law as well.

New Anti-Sanctions Measure Will Put Hong Kong Firms in a Risky Position

The problem with applying this law to Hong Kong is that it is one of the main locations for foreign investors to host their Asian branches. These firms are now going to be put in an awkward situation. On one hand, they will need to comply with their country of origin's sanction. On the other hand, they will need to follow the anti-sanction laws of the country they currently reside in.

This might seem like an impossible situation, but there is some potential for compromise. Economic sanctions and international compliance expert Nick Turner explains that the majority of international businesses are structured in a way that prevents them from having to follow sanctions. Furthermore, sanctions are just against a few individuals, not entire nations, so companies may not even need to do business with any sanctioned parties. Ultimately, Turner hopes that most organizations can avoid conflicts or resolve them quietly.

Markets Tumble in Response to Proposed Anti-Sanctions Laws

As soon as the anti-sanctions laws were initially announced, investors began to worry. Political unrest is never good for financial markets, and in this case, the political unrest directly threatens many investments. The potential for companies to have their assets seized has caused a lot of turmoil, and this has been reflected throughout the financial markets.

The U.S. government formally warned businesses that there could be risk to operating within Hong Kong. Authorities focused on concerns about things like travel bans and visa denials, but many financial institutions were also worried the contradicting laws could potentially require them to split into separate Chinese and U.S. companies. Even before China announced the law would most likely apply to Hong Kong as well, the use of the law on mainland China caused the Hong Kong Hang Seng Index to drop by 19 percent. The new plan to move the measure forward resulted in an even sharper decline.

Experts Advise a "Wait and See" Approach

Despite the concerning news, most financial experts are not urging companies to get their business out of Hong Kong immediately. One U.S. bank executive explained that the current laws are very vague. The anonymous source says their business is not worried enough to leave Hong Kong markets at the moment. There may be a good chance the law is mostly symbolic, and does not result in any real changes to Hong Kong's financial markets.

China has taken note of the growing concern and is also responding in an attempt to stabilize markets. On Friday, they decided to end their session without passing the law. Despite the expectation the law would be added to Hong Kong's charter this week, Chinese government officials chose to delay the vote. They explain that they are asking for further study and legal review before making any decisions. The fact that China is putting the law on hold provides further reassurance for worried investors. Despite the sharp dip in Hong Kong markets, the actual outcome might not be as bad as expected.