Economic and Political Ambiguity in Hong Kong Amid COVID-19 and the New Security Law

By Fatima Germanwala

By Fatima Germanwala

Before the novel Coronavirus (COVID-19) took over, putting halt to the world as we know it, Hong Kong was facing massive social unrest. Due to the widespread protest that started in June 2019 and the trade war between the US and China, the city’s economy took a toll as well. Hong Kong’s economy entered a recession by December 2019. According to the International Monetary Fund, Hong Kong’s economy contracted by 1.9% in 2019. This figure turned out to be much higher than the government's expected forecast of 1.3%.

The political and economic situation of the city further plunged into darkness because of the lingering COVID-19 situation. On July 29, 2020, Census and Statistics Department Hong Kong reported that the economy has contracted 9% in the second quarter from a year earlier. The city is also suffering from a relatively high unemployment rate of 6.2% last seen nearly 15 years ago. The chief economist of ING Bank, Ms. Iris Pang stated that unemployment will further rise to approximately 8% as many small restaurants are expected to run out of business.

On the political front, Hong Kong’s much anticipated Legislative Council elections due to be held on September 6, 2020, will now be conducted on September 5, 2021. This major decision came into force using the colonial-era Emergency Regulation Ordinance. Postponing the elections triggered much more criticism from the people of Hong Kong, especially because the Legislative Council or Legco is bound to serve only a 4-year term under the Basic Law.

However, the Chief Executive Carrie Lam sought help from mainland China, to which the State Council of the People’s Republic of China responded with their complete support. Denying all the allegations that postponing the election is a political move, the Chief Executive Carrie Lam said the decision to postpone elections has been tough. She further cited examples of other countries that had to postpone elections due to the novel COVID-19.

Since the beginning of the social unrest in Hong Kong, the Legco election had gained significant weightage. The protestors have been demanding the city’s current Chief Executive Carrie Lam step down from the position for poor handling of the protests and close alliance with mainland China. Moreover, the Legco elections will also play a crucial role in deciding Hong Kong’s political future and its position against mainland China’s coercive measures like the new "Security Law".

Paradoxically, the Hong Kong government barred nearly 12 pro-democracy candidates from running the elections due to speculations of their connection with foreign powers and opposition to the new Security Law imposed in the city. The list of disqualified candidates includes pro-democracy activist Joshua Wong, members from Civic Party, others who had won primary vote held by the opposition camp in July 2020.

The move to ban candidates can be perceived as the biggest blow to the electoral freedom of Hong Kong. Candidates have been disqualified from participating in elections in the past but banning candidates from Civic party and other moderate democrats appear as mainland China does not want any opposition to its policies and is indifferent to the prerequisites of Hong Kongers. Defending the move, Hong Kong’s Liaison office stated that the disqualification of candidates is based on the speculation that they aimed to “paralyze the government” and “subvert state power”.

Mainland China has been largely unaffected by the grappling recession situation in Hong Kong. Over the years, mainland China’s reliance on Hong Kong for growth has reduced as cities like Shenzhen have experienced significant development. Hong Kong used to generate approximately 18% of mainland GDP in 1997 compared to less than 3% in 2019.

According to an Asia-Pacific economy expert, Hong Kong can be soon expected to turn into a Chinese offshore center since there won’t be as many global players in Hong Kong's economic system as seen presently. These speculations are based on ongoing developments like the new National Security law and the transforming economic situation of Hong Kong.

In June 2020 more than a quarter of companies notified the American Chamber of Commerce Hong Kong that they will be shifting their businesses elsewhere. As many as 40% of these companies decided to move their businesses outside Hong Kong after the new National Security Law came into force.

On the other hand, several mainland Chinese companies with government backing have started strengthening their position in Hong Kong. Standing second to HSBC Holdings Plc in 2019, the Bank of China Ltd has become one of the principal lenders in the city. The contribution of Chinese financial institutes to provide loans to offshore Chinese companies in Hong Kong was 28.5% in 2015 which increased to 48.5% by 2019.

Additionally, on 7 August 2020, the United States imposed sanctions on Hong Kong’s Chief Executive Carrie Lam and 10 more senior members. This came as a response to the imposition of new National Security and undermining Hong Kong’s autonomy by mainland China. Under the sanction, any property or assets owned by these 11 people in the US will be frozen. According to some reports, the Hong Kong share market took a hit in June right after the US Senate passed the bill to impose sanctions on Hong Kong officials further shaking the fragile economic situation.

Whether or not the persistent resistance from the locals will help to conduct fair elections in Hong Kong remains to be seen. But the deteriorating economic situation of Hong Kong and increasing mainland presence signals that the city is facing a significant shift. The two pillars of Hong Kong, liberal political system and the free economy market is suffering from a severe blow largely due to the imposition of the new National Security Law.

If a new Security Law imposed to restore so-called social stability in the city can shake the Hong Kong markets, the situation will be much worse if the mainland decides to gain more control over Hong Kong. Besides affecting the economy, the new security law also jeopardizes people’s leverage to protest. Any protest in Hong Kong directly affects the global businesses running in the territory which is why the political system of the city actively tries to avoid social unrest at all costs.

If at all Hong Kong’s status as a global economic hub is reduced and shifted to other mainland Chinese territories like Shanghai or Shenzhen, the impact of protests in Hong Kong will reduce drastically. Although western powers like the US would try to oppose any such shift, global investors may side with mainland China to secure their investments and businesses. Since China is the only nation with comparatively promising economic growth amid the COVID-19 pandemic with 3.2% GDP growth in the second quarter of 2020, it is natural for global businesses to look towards securing their interests.

About the Author:

Fatima Germanwala (ORCID: 0000-0002-9666-1836) is a freelance researcher and content developer. She was formerly associated with Janes as Consulting Analyst and has completed Masters from the Department of Geopolitics and International Relations, Manipal Academy of Higher Education, India. 

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DISCLAIMER: The views expressed in this insight piece are those of the author and do not necessarily reflect the official policy or position of the IndraStra Global.