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China’s National Security Law: Will it affect Hong Kong as a Worldwide Financial Hub

This year has been characterized by months of political tension not only for some parts of the world but more specifically for Hong Kong, the Administrative Region of the Peoples Republic of China.

The rise of the coronavirus pandemic, and an extensive new state security law that China forced on the city. The national security law, unanimously declared by China’s ruling Communist Party, sets up corresponding secession, revolution, terrorism, and conspiracy with foreign forces to endanger national security.

The new law has ignited critiques and worries across the clampdown of free speech and the fastening of control over Hong Kong’s economic system. It was reiterated that the law would also pertain to non-permanent residents and people “from outside [the administrative region].”

Several individuals have contemplated over the new law and how it will influence citizens and the fate of Hong Kong.

Alicia Garcia-Herrero, Natixis Chief Economist for the Asia Pacific, said that:

“The national security law’s impact is uncertain. As far as it may be good for some but bad for others, one trend seems clear to me, namely that, mainland players will dominate even more than in the part.”

Would this be a warning for the US dollar investors?

The US Senate transferred the Hong Kong Autonomy Act, which refined that the US government should limit foreign banks and subsidiaries of US banks in Hong Kong from obtaining the US dollar system if they are associated with activities that target or contribute to undermining Hong Kong’s autonomy. This could possibly affect many corporations in Hong Kong, including cryptocurrency firms, as most crypto brokerages depend on the US dollar arrangement.

The Hong Kong dollar has been fastened to the US dollar for over 36 years. The Trump administration was reportedly settling on proposals to weaken the holder to the US dollar; nevertheless, according to experts, the idea did not appear to earn any reputation. The plan of weakening the 36-year-old peg appeared to be only damaging to Hong Kong banks and the United States, and not China itself.

The Hong Kong dollar’s peg to the US was organized almost a decade even before the US returned Hong Kong special trading status under the US-Hong Kong Policy Act of 1992; accordingly, the Hong Kong Monetary Authority (HKMA) does not need to solicit consent from the US to keep the marker.

“The peg can survive US-China tensions if there are no major outflows. But even if there are, HKD can still remain pegged to the USD if there is enough support from the Mainland authorities,” said Chief Economist Garcia-Herrero. “The issue is rather more a structural one. Does it make sense for an economy that is fully integrated with the Mainland to be pegged to a different currency?”

The Advance of the GBA Cities

The People’s Bank of China published a plan to encourage cross-border financial services, transactions, and investments in the Greater Bay Area (GBA), between Hong Kong, Macau, and nine Guangdong provincial cities.

By allowing the residents of the two special administrative regions, Hong Kong and Macau, to purchase Chinese bank-sold wealth management products, the sweeping plan aims to build the Greater Bay Area into one of the world’s largest economic regions.

“Hong Kong will become more integrated with the Mainland, and the Greater Bay Area will only push this process faster.” – Garcia-Herrero added

Could the Introduction of Hainan’s Free-Trade Port Replace Hong Kong?

The Chinese government is planning to make the province of Hainan into a free trade port, focusing on facilitating free trade, investment, and cross-border capital flows. The plan encourages government institutions to use blockchain and other emerging technologies to improve government functions.

Chinese President Xi Jinping has previously announced the decision to develop the island of Hainan into a pilot free trade zone in April 2018. With this decision, Xi said that it shows the country’s determination to liberalization and globalization while welcoming global investors.

In response to whether Hainan could potentially replace Hong Kong, Natixis Chief Economist said, “I don’t think Hainan is an option. The reason is always the same, namely, capital controls. While true for Shanghai, at least it already has the necessary size.”

“We have seen some interesting development in Hainan as of July 1, and I do think that there are opportunities, but Hainan is not going to replace Hong Kong, said Anson Bailey, Partner and Head of Technology, Media and Telecoms Hong Kong at KPMG China. Bailey mentioned that:

“For example, they said Shanghai is going to become the new Financial hub in China. People have been talking about that for the last decade. However, I don’t think that Hainan is going to overtake Hong Kong, it will complement Hong Kong.”

“Free-trade zone is not something new, it’s been around since the early 1980s. The free trade zones are very complementary when we look at the Greater Bay Area plan,” said Marcos Chow, Partner and Head of Technology Enablement Hong Kong at KPMG China. He added:

“They all have their designated roles that come together, all as parts of the plan. I never see it as the exclusion of one city over the other. It’s very exciting for us now to be in this period where these GBA plans are coming to fruition along with Hainan.”

China’s Special Administrative Region will likely continue to be a Worldwide Digital Financial Center

Neil Shen, also recognized as Shen Nanpeng, member of the National Committee of the Chinese People’s Political Consultative Conference and managing partner of Sequoia Capital China, presented five recommendations to China’s annual “two sessions” political event this year. One of the recommendations involves the modernization and technology advancement of the Greater Bay Area, which he has presented progressively in the past three years.

In Shen’s plans, he proposed a Hong Kong-based cross border stablecoin, as a framework for a cross-border foundation network between China, Japan, and South Korea as well as the special administrative region. Shen foresees that this progress would make Hong Kong as the global digital financial center and will entitle the semi-autonomous city to achieve “stable economic and social development.”

The stablecoin plan subjects the financial autonomy of Hong Kong, and Garcia-Herrero proposed, “Financial autonomy is already limited in as far as most of the inflows into, and outflow from Hong Kong come from the Mainland. It may be that Hong Kong can serve as a useful platform to reduce China’s dependence on the US dollar.”

“I think people that have been already based here in Hong Kong have a pretty good understanding in terms of what’s going on. Those start-ups that are already here, they want to be here as they also recognize that Hong Kong is an international finance center and international trading hub,” said Bailey. He concluded:

“Hong Kong is a resilient place and will continue to be a very international city for Finance and for Business.”

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