'Extradition bill will damage Hong Kong's economy, relationship with US'

This picture taken on June 13 shows a general view of the Hong Kong skyline. AFP-Yonhap

• Published Jun 14, 2019 3:41 PM KST
• Updated Jun 14, 2019 3:41 PM KST

By Chad Bray, Ryan Swift

A controversial extradition bill that sparked massive protests in Hong Kong this week could potentially damage the city's economy and its relationship with the United States, analysts and economists said.

Ines Lam, an economist at CLSA, said in a research note that the proposed extradition bill, which would make it easier to send people from Hong Kong to mainland China for trial, could be a “tipping point” in U.S.-Hong Kong relations and threaten Hong Kong's special status.

U.S. senators Ted Cruz and Ed Markey introduced a bipartisan bill on Thursday to amend the United States-Hong Kong Policy Act of 1992, requiring an evaluation by the U.S. Secretary of State of how Beijing “exploits Hong Kong to circumvent the laws of the United States”.

“The economic impact of the removal of the U.S.-Hong Kong Policy Act is potentially big, as the loss of confidence can set off the withdrawal of foreign investment in Hong Kong businesses and assets,” Lam said.

At least 80 people, including 22 police officers, were injured as protesters blocked major roads in downtown Hong Kong and clashed with police ahead of a legislative session on the extradition bill on Wednesday.

More than 1 million people marched in the streets last weekend in opposition, according to organisers, and another march is planned on Sunday.

The U.S.-China Economic and Security Review Commission, an agency created by the U.S. Congress, said in a report in May that the extradition bill would increase the city's “susceptibility to Beijing's political coercion and further erode Hong Kong's autonomy”.

Gillem Tulloch, a former analyst at CLSA who founded GMT Research, said he is worried about the longer-term impact of the extradition treaty on his ability to provide critical assessments of companies' accounting practices. GMT Research has become known for highlighting suspicious accounting at Chinese companies.

Tulloch, who hinted at moving his small company from Hong Kong because of the proposed extradition law, suggested that critical analysis of key Chinese companies could later be construed as leaking state secrets, leading to extradition to China if the agreement is broadened.

“The point is once you've overcome the resistance to it [the treaty], then it's easier to push through changes,” he said. “That's why it's important to stop it now.”

He also said that some hedge funds based in Hong Kong were looking at creating dual structures as a result of the proposed law.

James Tien, a former Liberal Party leader and chairman of the investment firm Manhattan Holdings, said local businesspeople who may have engaged in questionable practices in the mainland in the past, such as bribery, may be more concerned than their foreign counterparts about Hong Kong's future legal autonomy.

Tien, who does not agree with the proposal, said that the extradition law will certainly be passed by the Legislative Council, even if local business leaders are secretly worried.

“The current crop of legislators don't have the guts to say no,” Tien said.

Howard T D Bilton, chairman of the corporate services provider Sovereign Group, said the proposed legislation has to be “of grave concern to anybody who respects civil liberties”.

“The stock market has already reacted by diving sharply. If this goes through, property prices will follow,” Bilton said. “As will an exodus of right minded people who have no wish to live under this type of regime.”

The Hang Seng Index had its biggest daily decline since May 9 on Wednesday amid escalating U.S.-China tensions and scenes of clashes between police and protesters. The index was down 0.51 per cent to 27,155.78 in midmorning trading on Friday.

Logistics real estate developer ESR Cayman postponed its listing on the Hong Kong stock exchange on Thursday, citing “current market conditions”.

Eleanor Olcott, China policy analyst at the research provider TS Lombard, said that Hong Kong, in the short term, would remain an attractive centre for international finance and trade even if the extradition bill passes.

“But in the longer run, those benefits will become harder to discern as Hong Kong becomes increasingly entangled in the geopolitical struggle between the two Pacific Rim powers,” Olcott said in a research note. “The U.S. administration is currently reappraising its China policy and has drifted away from its pre-Trump strategy of deepening economic ties with allies in the region as a hedge against the [People's Republic of China].”

The rising trade tensions between the world's two biggest economies has already weighed on Hong Kong's gross domestic product, which grew at its slowest pace in a decade in the first quarter. GDP growth eased to 0.5 per cent year on year.

Hong Kong Secretary for Commerce and Economic Development Edward Yau Tang-wah said recently that the decline in trade in Hong Kong could continue into the second and third quarters this year.

The risk for Hong Kong is if it is seen as a “weak link” in an economic and technology conflict between the two countries, Olcott said.

Hong Kong companies have been using the “first sale rule” ― a legal loophole in U.S. trade laws ― to avoid the full cost of tariffs implemented by the Trump administration on Chinese-made goods.

U.S. President Trump has imposed tariffs on nearly half of all Chinese products imported into the U.S. and threatened to place 25 per cent duties on another $300 billion of goods.

“The danger is that the U.S. starts to view this practice as akin to a weak-point in its trade war,” Olcott said. “The drive in [Washington] across both the executive and legislative branches of government to protect U.S. technology from Chinese access could provide a further incentive to upend the territory's separate customs status. U.S. commerce officials have long argued that this status has been exploited as a loophole for controlled technologies being diverted to the mainland.”