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City risks losing special status after Pompeo moves to drop autonomous designation. 

HONG KONG/SHANGHAI — Lawmakers in China on Thursday passed legislation that will extend the country’s opaque national security law to Hong Kong, an expected move that has prompted large demonstrations in the city and a warning from Washington.

The bill, which was passed by a vote of 2,878 in favor to one objection, has put the Asian hub’s economic status at risk in Washington, where Secretary of State Mike Pompeo said Wednesday that Hong Kong no longer deserves special treatment. “No reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground,” he said.

The vote at the annual meeting of the National People’s Congress, China’s parliament, could prompt more countries to follow the U.S. in re-evaluating trade arrangements with Hong Kong, which is home to many multinational companies’ Asian headquarters.

The former British colony returned to Chinese rule in 1997 and has enjoyed a high degree of autonomy under the framework of “one country, two systems,” which sets it apart from mainland financial and business centers such as Shanghai and Shenzhen. Hong Kong maintains an independent judiciary, a separate currency and financial system, and guarantees on freedom of speech.

Under the U.S.-Hong Kong Policy Act of 1992, Washington treats Hong Kong as a separate jurisdiction from mainland China and gives the territory special treatment regarding matters of travel and trade.

At a news conference following the NPC, Chinese Premier Li Keqiang insisted the law does not change Hong Kong’s status.

“One country, two systems is China’s basic state policy,” Li said. “The decision adopted by the NPC is designed for steady implementation of ‘one country, two systems’ for Hong Kong’s long-term prosperity and stability.”

Hong Kong Chief Executive Carrie Lam welcomed the passage of the bill, and vowed to “fully cooperate with” the standing committee of NPC to complete the legislation process.

“We will proactively reflect on the detailed situation in Hong Kong during the process,” she said, adding that she will seek to reassure the public that the law will only affect a “extremely small minority of criminals.”

“It will not affect the legitimate rights and freedoms enjoyed by Hong Kong residents,” Lam said.

Riot police stand guard outside a high-end mall in Hong Kong’s Central business district on Thursday. Officers and protesters have clashed this week over China’s national security law for the city.   Last November, President Donald Trump signed into law the Hong Kong Human Rights and Democracy Act, which requires the State Department to report to Congress at least annually on whether Hong Kong has retained the high degree of autonomy promised by Beijing.

Pro-democracy activist Joshua Wong, who helped lobby for the act in Washington, urged Beijing to withdraw the national security legislation immediately. “Don’t ignore the response from the international community,” he said on Thursday.

Citing sources from Washington, Wong said that the U.S. is likely to suspend special trade treatments for Hong Kong in order to exert economic pressure on Chinese companies, but preferential visa arrangements for Hong Kong citizens are likely to remain. He said that the new measures could be implemented in the coming one to two weeks unless Beijing changes its policy for the city.

“The value to Beijing of preserving Hong Kong’s autonomy would probably fall” if the city loses its special status, economists at Capital Economics said in a note.

This would put pressure on Trump over whether to sign an executive order to impose such a decision, as the current review mechanism in Congress would require the State Department to consider whether repealing Hong Kong’s special treatment would further erode its autonomy.

Beijing’s move to push ahead with the legislation has triggered widespread concern among business communities and supporters of democracy.

“For now, the largest impact is through affecting Hong Kong’s status as a global financial hub,” said Tommy Wu, senior economist at Oxford Economics. “It also raises the question as to whether foreign corporates are still willing to use Hong Kong as a regional headquarter, or if they will allow their cash or capital to sit in Hong Kong,” he said, adding that losing “safe haven” status could undermine foreign investment in the city.

In addition to facing a higher threat of U.S. tariffs, Hong Kong also risks losing access to sensitive U.S. technologies.

The new proposal targets activities such as “splitting the country and subverting state power,” as well as terrorism and foreign interference in Hong Kong. Anti-government demonstrators in Hong Kong have been referred to as terrorists by some mainland officials, and similar laws on the mainland have been used to suppress dissidents and human rights lawyers.

In Hong Kong, hundreds of people have been arrested during protests against the motion over the past week.

Now that the resolution has passed, the standing committee of the National People’s Congress will draft the full text of the law, which can be enacted as soon as June. It will become law in Hong Kong after the city government publishes the legislation in its gazette.

The high economic stakes and delicate political balance surrounding the city’s autonomy has made national security legislation one of the thorniest issues for Hong Kong leaders over the years.

It cost the political career of Tung Chee-hwa, the city’s first chief executive after the 1997 transfer of power, who oversaw a failed attempt to pass a national security bill that triggered a then-record protest of half a million people in 2003. With tensions heightened by last year’s anti-government protests, the city’s current leader, Chief Executive Carrie Lam, has said it was unlikely such legislation could be passed locally in the near future.

Additional reporting by Michelle Chan.

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