London Daily

Focus on the big picture.
Friday, Oct 03, 2025

National security law: Hong Kong’s appeal as business hub in the spotlight as China law looms large

National security law: Hong Kong’s appeal as business hub in the spotlight as China law looms large

China’s National People’s Congress is set to approve a motion to amend Hong Kong’s Basic Law, the city’s mini-constitution, on Thursday. It is perceived by many as a damaging blow to the city’s autonomy that could undermine its many business advantages

Financier and venture capitalist Simon Calton is watching closely how China implements its new national security legislation for Hong Kong, as the impending controversial changes could raise uncertainty that would translate into higher investment costs.

Calton has long been a strong supporter of investing in Hong Kong, a city he sees as serving as a gateway to huge Chinese investment opportunities, especially in the 5G and blockchain sectors, along with projects associated with the nation’s Belt and Road Initiative.

But with China’s National People’s Congress set to approve a motion to amend Hong Kong’s Basic Law, the city’s mini-constitution, to include national security legislation on Thursday, Calton is left with an uneasy feeling of uncertainty.

The legislation, which may still take many months to come into force, is aimed at preventing and punishing subversion, terrorism, separatism and foreign interference, “or any acts that severely endanger national security.”

“Would it stop me from investing? No, but it would make us look real hard at what our security is and what our exit [strategy] is so that we have a backup plan for any problems,” said Calton, CEO of UK-based investment firm Carlton James Group. “Because of that, it means making investments is not so easy, and it's inevitable that the market will be affected.”

The proposed national security law is perceived by many as a damaging blow to the city’s autonomy that could undermine its many business advantages, including its independent regulatory environment and common law jurisdiction for property and contractual rights.

Hong Kong’s considerable independence, which has helped it build the city into a regional business headquarters centre and global financial hub since the handover to China in 1997, was promised by Beijing in the Sino-British Joint Declaration signed with Britain in 1984 and in the city’s “one country, two systems” constitutional principle.

Like Calton, it is likely global investors will continue to invest through Hong Kong for now, but watch closely for clearer details of the legal framework and implementation mechanism of the new law before deciding if major changes will later be needed to their business strategies.



“It raises serious questions over the viability of one country, two systems. This uncertainty is bad for business, and is likely over time to have a serious impact on decisions whether to invest in Hong Kong or not,” said a European diplomat based in Hong Kong who did not wish to be identified, adding the national security law would be seen in the international community as a significant “moving of the goalposts”.

Hong Kong’s stock benchmark, the Hang Seng Index, plunged over 1,300 points on Friday in response to the first reports of the national security law, marking its biggest slump since 2015, before eventually stabilising. The index was already under pressure from a domestic economic recession, and it remains 17 per cent down this year.

One sign of confidence in Hong Kong's financial sector comes from the city’s free flow of capital via the convertibility of the Hong Kong dollar. The local currency is pegged to the US dollar, and is allowed to trade within a narrow trading band between 7.75 and 7.85 per US dollar, maintaining some distance from China’s yuan.

The Hong Kong dollar quickly cut its losses from Friday, when it recorded its biggest daily fall in two months, showing financial resilience despite the city’s political uncertainty.

On Wednesday, it was exchanging hands at 7.7524 against the US dollar, trading near the strong end of its permitted trading range where it has stayed in recent months due to capital inflows. Traders have been parking cash in Hong Kong to earn higher interbank market rates compared to their US dollar counterparts.

“The Hong Kong dollar peg is an anchor of financial stability that the city is built on, and I don’t see any change in the peg regime in the city,” said Jeffrey Halley, senior market analyst, Asia-Pacific, at currency trading firm Oanda.

It is true that the size of Hong Kong’s economy compared to that of China has declined from 16 per cent in 1997 to 3 per cent in 2018, but a narrow comparison focusing solely on gross domestic product masks Hong Kong’s financial relevance to the mainland and the world, analysts said.

Hong Kong’s role as an offshore financial centre helps facilitate China’s access to foreign investment because the mainland maintains a relatively closed capital account restricting capital flows. Hong Kong is also an important springboard for re-exports of Chinese-made goods.



In 2019, around US$96.3 billion, or 70 per cent of China’s US$138 billion foreign direct investment inflows, were conducted through Hong Kong, Chinese government data showed.

Beijing was quick to reassure foreign investors this week as protests in the city resumed at the weekend, having been dormant since January due to the coronavirus outbreak.

Anti-government protests caused initially by a now-abandoned extradition bill, that would have allowed criminal suspects to be extradited to China for the first time, had roiled the city since June last year. The protests continued even after withdrawal of the bill because of demands that included wider democratic freedoms.

“Instead of becoming unnecessarily worried, people should have more confidence in Hong Kong’s future. This will improve Hong Kong’s legal system and bring more stability, a stronger rule of law and a better business environment to Hong Kong,” Chinese Foreign Minister Wang Yi said on Sunday.

Nevertheless, others remain worried that Beijing is willing to place politics over economics in implementation of the new law.

“If Hong Kong is not able to serve effectively as a safe haven insulated from the political risks of doing business in the rest of China, there is no rationale for international businesses to be here: they can either go directly to China, or base themselves elsewhere in Asia,” said Hong Kong-based lawyer and author Antony Dapiran.

“This development will increase the urgency of questions foreign investors have already begun to ask about Hong Kong's autonomy and its stability as a long-term base for business in the region.”

Edward Chin, a hedge fund manager in Hong Kong, warned that the proposed law may trigger a downgrade of Hong Kong's credit rating, affecting the cost of the city’s fundraising.

In April, Hong Kong was downgraded to AA- from AA by Fitch Ratings, citing Hong Kong's gradual integration into China's national governance system and the associated rise in economic, financial and sociopolitical linkages as a reason for a closer alignment of their respective sovereign ratings. China is now rated by Fitch one notch below Hong Kong at A+.

Chin also said that the national security legislation may accelerate fund outflows from wealthy investors, who are moving their money because they “can’t see a future [in Hong Kong]."

But Joseph Yam Chi-kwong, an executive council member and former chief executive of Hong Kong Monetary Authority, Hong Kong’s de facto central bank, said that such worries were not due to the legislation itself.

“Rather, there are worries the US will use the legislation as an excuse to further attack China and weaponise the capital market,” he said.

Under the Hong Kong Human Rights and Democracy Act passed last year, the US has until the end of May to decide if it will stop recognising the city’s autonomy from China, which would allow Washington to revoke the current preferential economic and trade privileges. Currently, exports from Hong Kong are not subject to the US tariffs imposed on Chinese goods as part of the trade war.

US President Donald Trump said on Tuesday that his administration would announce a response to the legislation “before the end of the week – very powerfully.”

“[It’s] hard to see how Hong Kong can remain a financial hub if China takes over,” said White House press secretary Kayleigh McEnany.

Calton from Carlton James Group said the discontent shown by the Hong Kong public raised questions among foreign investors about how the entire process was being handled, fuelling uncertainty of the regulatory and political risks in the city.

His preference for Hong Kong’s level playing field for foreign firms comes from his tough experience in setting up a foreign-invested company in Shanghai in 2014. He learned of the difficulties foreign companies in China have in securing intellectual property protection and effective patents for his investment in a US technology company.


“It's not that we think that this law in itself is a huge problem from a business point of view,” Calton said. “[But] that’s an important problem because the step makes people worry that there is a risk that something beyond their control could cause them to lose money.

“This [new security law] is going to come up once we get to the feasibility study of the deals that we are trying to put together in Hong Kong.”

Newsletter

Related Articles

0:00
0:00
Close
Trump Administration Launches “TrumpRx” Plan to Enable Direct Drug Sales at Deep Discounts
Trump Announces Intention to Impose 100 Percent Tariff on Foreign-Made Films
Altman Says GPT-5 Already Outpaces Him, Warns AI Could Automate 40% of Work
Singapore and Hong Kong Vie to Dominate Asia’s Rising Gold Trade
Trump Organization Teams with Saudi Developer on $1 Billion Trump Plaza in Jeddah
Manhattan Sees Surge in Office-to-Housing Conversions, Highest Since 2008
Switzerland and U.S. Issue Joint Assurance Against Currency Manipulation
Electronic Arts to Be Taken Private in Historic $55 Billion Buyout
Thomas Jacob Sanford Named as Suspect in Deadly Michigan Church Shooting and Arson
Russian Research Vessel 'Yantar' Tracked Mapping Europe’s Subsea Cables, Raising Security Alarms
New York Man Arrested After On-Air Confession to 2017 Parents’ Murders
U.S. Defense Chief Orders Sudden Summit of Hundreds of Generals and Admirals
Global Cruise Industry Posts Dramatic Comeback with 34.6 Million Passengers in 2024
Trump Claims FBI Planted 274 Agents at Capitol Riot, Citing Unverified Reports
India: Internet Suspended in Bareilly Amid Communal Clashes Between Muslims and Hindus
Supreme Court Extends Freeze on Nearly $5 Billion in U.S. Foreign Aid at Trump’s Request
Archaeologists Recover Statues and Temples from 2,000-Year-Old Sunken City off Alexandria
China Deploys 2,000 Workers to Spain to Build Major EV Battery Factory, Raising European Dependence
Speed Takes Over: How Drive-Through Coffee Chains Are Rewriting U.S. Coffee Culture
U.S. Demands Brussels Scrutinize Digital Rules to Prevent Bias Against American Tech
Ringo Starr Champions Enduring Beatles Legacy While Debuting Las Vegas Art Show
Private Equity’s Fundraising Surge Triggers Concern of European Market Shake-Out
Colombian President Petro Vows to Mobilize Volunteers for Gaza and Joins List of Fighters
FBI Removes Agents Who Kneeled at 2020 Protest, Citing Breach of Professional Conduct
Trump Alleges ‘Triple Sabotage’ at United Nations After Escalator and Teleprompter Failures
Shock in France: 5 Years in Prison for Former President Nicolas Sarkozy
Tokyo’s Jimbōchō Named World’s Coolest Neighbourhood for 2025
European Officials Fear Trump May Shift Blame for Ukraine War onto EU
BNP Paribas Abandons Ban on 'Controversial Weapons' Financing Amid Europe’s Defence Push
Typhoon Ragasa Leaves Trail of Destruction Across East Asia Before Making Landfall in China
The Personality Rights Challenge in India’s AI Era
Big Banks Rebuild in Hong Kong as Deal Volume Surges
Italy Considers Freezing Retirement Age at 67 to Avert Scheduled Hike
Italian City to Impose Tax on Visiting Dogs Starting in 2026
Arnault Denounces Proposed Wealth Tax as Threat to French Economy
Study Finds No Safe Level of Alcohol for Dementia Risk
Denmark Investigates Drone Incursion, Does Not Rule Out Russian Involvement
Lilly CEO Warns UK Is ‘Worst Country in Europe’ for Drug Prices, Pulls Back Investment
Nigel Farage Emerges as Central Force in British Politics with Reform UK Surge
Disney Reinstates ‘Jimmy Kimmel Live!’ after Six-Day Suspension over Charlie Kirk Comments
U.S. Prosecutors Move to Break Up Google’s Advertising Monopoly
Nvidia Pledges Up to $100 Billion Investment in OpenAI to Power Massive AI Data Center Build-Out
U.S. Signals ‘Large and Forceful’ Support for Argentina Amid Market Turmoil
Nvidia and Abu Dhabi’s TII Launch First AI-&-Robotics Lab in the Middle East
Vietnam Faces Up to $25 Billion Export Loss as U.S. Tariffs Bite
Europe Signals Stronger Support for Taiwan at Major Taipei Defence Show
Indonesia Court Upholds Military Law Amid Concerns Over Expanded Civilian Role
Larry Ellison, Michael Dell and Rupert Murdoch Join Trump-Backed Bid to Take Over TikTok
Trump and Musk Reunite Publicly for First Time Since Fallout at Kirk Memorial
Vietnam Closes 86 Million Untouched Bank Accounts Over Biometric ID Rules
×