Biden to Aim Hong Kong Warning at Investors Shrugging Off Risks

A formal warning the Biden administration plans to issue to companies doing business in Hong Kong springs from U.S. officials’ concern that investors aren’t taking the risks of operating in the city seriously enough, according to people familiar with the issue.

The key message in the administration’s “business advisory” Friday will be that Hong Kong’s once-independent legal system is now essentially as subject to government interference as mainland China’s, where the ruling Communist Party has almost complete control, according to the people, who asked not to be identified discussing the document before it’s public.

The advisory won’t demand specific action by the banks, businesses and investors who have transformed Hong Kong into one of the world’s financial capitals alongside London and New York. Instead it’s meant to underscore the threats -- legal, financial and otherwise -- the U.S. sees as Beijing consolidates its grip, erasing boundaries agreed to when the U.K. ceded control in 1997.

While businesses have grown increasingly uneasy about the city’s shifting landscape, experts and consultants say the changes in Hong Kong have been so swift that many still haven’t sufficiently grappled with the inherent dangers. At the same time, they argue that the situation may not be as dire as the U.S. says, and they don’t anticipate massive departures.

“Non-Chinese firms should recognize that Hong Kong presents both unique business opportunities and newly compounded risks,” said Kurt Tong, a partner at the Asia Group consulting firm. “There is no safety in numbers, but neither should firms join a stampede to exit.”

According to the people, the advisory will warn firms about the potential ramifications of Hong Kong’s national security law, imposed on the city by Beijing, which prohibits collusion with foreign forces or anything construed as subverting the authority of the central government. Data that foreign companies store in Hong Kong could also be at risk, they said.

So far, many financial institutions have actually ramped up hiring.

Citigroup Inc. said in May that it plans to hire more than 1,000 professionals across its wealth franchise in Hong Kong over the next five years, stepping up its expansion amid an increasingly heated grab for talent in the region. Goldman Sachs Group Inc. is hiring 320 staff in China and Hong Kong, as China opens its $54 trillion financial market fully to foreign brokerages and asset managers.

The White House declined to comment on the advisory, and the State Department didn’t immediately respond to a request for comment.

Even without making specific demands, the advisory from President Joe Biden’s administration will mark a stunning turnaround for a city that still hosts the world’s biggest banks and for decades marked an entry point to China as its development accelerated beginning in the 1980s.

China’s “one country, two systems” approach to Hong Kong had already been under pressure before massive anti-government protests erupted in 2019. Under President Xi Jinping, Beijing quickly moved to silence independent voices, arresting protest leaders, imposing a national security law that allows for the extradition of people accused of crimes to China and forcing the closing of Apple Daily, a high-profile media outlet critical of corruption and the Communist Party.

Geopolitical tensions are nothing new for companies that do business in China. But an “anti-foreign sanctions” law that China’s rubber-stamp parliament passed in June will put multinationals in a difficult position because it may force companies to weigh complying with U.S. sanctions on Chinese entities against the risk that China may punish them for doing so.

“Chinese counterparties and are nervous about agreeing to comply with foreign sanctions,” said Adam Smith, former senior adviser in the Treasury Department’s sanctions unit and now a partner at Gibson, Dunn & Crutcher. “It’s creating an ‘us versus them’ scenario for multinational businesses.”

The advisory on Friday will mark a further step in the Biden administration’s far more pessimistic tone about Hong Kong in the months since the Trump administration rolled back the city’s special trade privileges, saying the former British colony’s “high degree of autonomy” was quickly eroding.

China’s dismantling of Hong Kong’s freedoms -- and the U.S. response -- has been a driving force for worsening ties between the world’s two biggest economies. Starting under Trump, Beijing and Washington were increasingly at odds over issues including trade, technology, the origins of the Covid-19 pandemic and human rights.

After reports of the advisory first emerged earlier this week, China’s Foreign Ministry reaffirmed its opposition to what it views as U.S. interference in Hong Kong’s affairs. Ministry spokesman Zhao Lijian told reporters that the city had been more stable under the security law.

©2021 Bloomberg L.P.

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