China’s Crackdown on Hong Kong’s Freedoms Is Bad for Business

China’s encroachment on Hong Kong’s democratic freedoms and its interference in the city’s independent judiciary are threatening to diminish Hong Kong’s appeal for international investment and trade. In his open letter to United States’ President Donald Trump the Hong Kong National Party’s convener, Andy Chan urged Trump to ​“suspend the differential treatments between Hong Kong and China.” He went on to write, ​“with the loss of autonomy and protection to fundamental rights, there is no longer any basis for the United States to give Hong Kong those treatments under the Policy Act.”

Under the U.S. Hong Kong Policy Act of 1992, the United States treats Hong Kong as a separate customs area as long as Hong Kong is seen as sufficiently autonomous from the mainland. China has an interest in maintaining this autonomy under the ​“one country, two systems” status quo. In addition to the freedoms that the city enjoys, Hong Kong also functions as China’s economic gateway to the world. Limiting the impact of the U.S.-China trade war will involve upholding the unique status of Hong Kong, which in turn requires safeguarding the rights and freedoms guaranteed to the territory under the Hong Kong’s Basic Law. China must stop prioritizing ideological control in Hong Kong over its economic success.

Hong Kong has been an essential financial and trading center for China since the introduction of ​“one country, two systems” and was ranked the world’s freest economy by the Heritage Foundation’s 2018 Index of Economic Freedom. Hong Kong’s internationalization of the renminbi and support for large flows of foreign direct investment to the Chinese mainland have been crucial for China’s economic rise. The connection between Hong Kong’s stock exchange and the stock exchanges in Shanghai and Shenzhen allows for mainland Chinese companies to access the global capital markets for equity financing while making it easier for international investors to access the Chinese market. In 2017, 44.9 percent of all overseas-funded projects approved in mainland China were tied to Hong Kong interests, while cumulative capital inflow from Hong Kong was over $1 trillion – more than half of China’s total. Hong Kong is still the largest offshore renminbi market, allowing Chinese banks to strengthen their international market position, and it continues to play a vital role for China in acquiring technological and management expertise.

Money flows through Hong Kong because the territory provides a stable and reliable investment climate created by independent judges and fair, transparent courts that uphold the rule of law. The 1997 Sino-British Joint Declaration guarantees Hong Kong’s high degree of autonomy and ensures certain rights and freedoms, including civil and political rights that do not exist in China. The territory can also protect foreign companies and their investments under the Basic Law. This is exactly what gave Hong Kong the advantage of being a separate customs area under the U.S. Hong Kong Policy Act. China has an interest in maintaining the status quo of ​“one country, two systems” and safeguarding the rights and freedoms guaranteed to the territory because it will limit the negative impact of the trade war through the survival of the Policy Act.

But the Chinese government has recently showed its willingness to sacrifice Hong Kong’s unique status for increasing ideological control of the territory. In 2014, Beijing released a white paper that outlines the Chinese authorities’ vision of a Hong Kong that is part of China. The white paper effectively proposed an end to judicial independence, calling lawyers ​“administrators” and requiring them to be ​“patriotic” — that is, to uphold China’s interests. That sparked protests by lawyers. In September this year, the government banned the pro-independence Hong Kong National Party of Andy Chan in the name of national security (Chan retaliated by writing the open letter to Trump). And last month, the Hong Kong government rejected the visa renewal application of the Financial Times’ Asia editor, Victor Mallet, without explanation. These moves are slowly eroding civil liberties and threatening the rule of law that was guaranteed to the territory at the handover. But the international community, most importantly the United States, has started to take notice.

This is evident in the recent calls by Chan and others to review the Hong Kong Policy Act of 1992, which is the basis for the U.S. government to treat Hong Kong as a nonsovereign but distinct entity, including in the trade of dual-use technology – products such as electronics and software that can have military application – which mainland China is not able to access. The U.S.-China Economic and Security Review Commission’s annual report, released on November 14, echoed Chan’s concerns of Hong Kong’s loss of autonomy. The report recommends that the Trump administration examine its treatment of Hong Kong and the mainland as separate customs entities due to China’s ​“encroachment” on Hong Kong’s freedoms and the potential implications of Chinese access to dual-use technology for U.S. national security.

As the trade war intensifies and distrust brews between the United States and China, Trump could — simply through an executive order — use the Hong Kong Policy Act to pressure Beijing by delivering a blow to Hong Kong’s trade and financial system if he personally deems Hong Kong ​“not sufficiently autonomous.” The gateway role that Hong Kong plays for China would be diminished, which is bad news for both Hong Kong and China. Beijing’s tightening grip over Hong Kong’s democratic freedoms is giving Trump an excuse to weaponize this power.

With China’s status as a growing market at risk by the U.S.-China trade war and doubts over China’s willingness to stand by its guarantees for Hong Kong’s autonomy increasing, Beijing needs to re-establish itself as a reliable economic partner in the global economy. Given its role as a project financer under the Belt and Road Initiative, it needs a strong financial market strategy; here Hong Kong is essential. The city’s gateway role can be stripped away if Trump decides to slap tariffs not only on goods from China, but also on goods from Hong Kong. It would threaten the economic status of both and seal Hong Kong’s fate as ​“any other Chinese city.”

Hong Kong provides a functioning and strong legal system based on the rule of law, anti-corruption bodies, and a large pool of international financial talent. The city offers the experienced economic grounding that China needs to weather the storm of global economic uncertainty and implement its key connectivity projects, like the Belt and Road Initiative. ​“One country, two systems” only makes sense if legal and financial institutions in Hong Kong are able to exist freely and do not fall victim to China’s growing desire for ideological orthodoxy. Yet China still appears to be prioritizing control over economically rational decision-making.

Guaranteeing Hong Kong’s civil liberties, protecting its independent institutions, and ensuring its autonomy are in China’s own best interest. Doing so would ensure that Hong Kong’s special status as a separate customs area does not get revoked at the stroke of an unpredictable U.S. president’s pen.

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This commentary was originally published by The Diplomat on December 1, 2018.