Hong Kong Human Rights Act may include long-term negatives for local businesses
On Tuesday, the US Senate passed the Hong Kong Human Rights and Democracy Act (HK Human Rights Act 2019) in a unanimous vote. Pending some reconciliations with the House of Representatives and President Trump’s approval, the bill will likely become law in the near future.
Since Hong Kong was returned to China from the British government in 1997, the special administrative region has been treated by the US government as a separate economic entity from mainland China under the United States-Hong Kong Policy Act of 1992. This means Hong Kong has been exempted from the additional tariffs that the US has been imposing on China since last year. In addition, Hong has been exempted from US export restrictions on some ‘sensitive technologies’, as long as Hong Kong protects the technologies from ‘improper use’.
In a nutshell, the HK Human Rights Act requires the US government to conduct an annual review of Hong Kong’s special treatment in the context of political developments in Hong Kong with the possibility of imposing sanctions on any individuals considered to be violating ‘internationally recognized human rights’ in Hong Kong. The act requires the Department of State report annually to Congress as to whether Hong Kong is sufficiently autonomous from China to justify its unique treatment. It also requires the Department of Commerce to report annually on China's efforts to use Hong Kong to evade US export controls and sanctions.
In our view, the near-term impact of the new legislation on Hong Kong will likely be limited as the probability that the US government removes Hong Kong’s special economic status is low for at least two reasons. First, Beijing has stayed largely on the side lines, avoiding any direct intervention in the recent protests in Hong Kong. Second, as a global business and financial hub, Hong Kong hosts large US commercial interests.
However, the long-term impact on Hong Kong of the new legislation is most likely negative as the annual review process will undoubtedly add a layer of uncertainty to companies operating there. This uncertainty will likely reduce Hong Kong’s attractiveness as a hub of business and discourage foreign investment.
In addition, this new legislation complicates further the already thorny trade negotiations between the US and China. In our view, a near-term trade ceasefire between the US and China (the so-called Phase One deal) is still likely despite the passage of the HK Human Rights Act, but future negotiations could become even bumpier.