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Just as Hong Kong has turned the corner in the coronavirus crisis and tourism players are launching their first recovery steps of getting locals to vacation at home, the city is hit by a fresh round of protests over a new national security law that has far-reaching ramifications.
It’s hard to imagine that unrest will stop over the next few months as the bill, approved by China parliament on May 28, goes for drafting and implementation before September. While continued demonstrations will crimp Hong Kong Tourism Board’s recovery attempts, it is the long-term effect of the bill on Hong Kong’s status as Asia’s world city, financial hub and, consequently, travel gateway that is the big worry.
Beijing and Hong Kong authorities assert that the bill is meant to protect the city — by tackling secession, subversion, terrorism and acts that endanger national security — and not to erode the freedoms Hong Kong enjoys under the one country/two systems framework with China. The U.S., embroiled in a trade war with China, enters the fray by seeing the bill as a clear sign Hong Kong is no longer autonomous, hence it will remove the special trade treatment it accords Hong Kong.
Hong Kong’s independence is what makes it attractive and why it is a wellspring of fearless go-getters. Rob that, and Hong Kong is no more. Concerns of it becoming just another Chinese city such as Shenzhen or Shanghai have been aired privately or publicly since protests began nearly a year ago, as in this Skift story, What If Hong Kong Falls?, in August 2019. However, the US is the first to openly say it’s not a “what if” but has happened.
Hong Kong has become a “political football,” said Marco Förster, senior associate at Dezan Shira, a pan-Asia firm that guides foreign companies on establishing and growing their business in the region.
“What is to be feared is, this will contribute further to Hong Kong’s trip along the downward spiral and there will be an exodus of business,” said Förster. “If firms see that China’s heavier presence in the city is interfering with fair arbitration, they will look for alternatives, especially when there are fitting ones in the region such as Singapore. Many business leaders who were still hesitant about the idea of relocating their Asia-Pacific headquarters might now finally make the move.”
Doubtless, this will have a bearing on travel segments such as corporates, meetings, events and, not least, Hong Kong’s standing as Asia’s travel hub in the future. Hong Kong airport is the world’s busiest for cargo (4.8 million tons moved in 2019) and Asia’s busiest for passenger traffic (71.5 million handled last year). It connects to 220 destinations by 120 airlines. Hong Kong’s air links to North America have grown the fastest over the last five years, according to the International Air Transport Association.
Singapore last week revealed it has received $9.3 billion (S$13 billion) in investment commitments in the first four months of the year, which exceeds the up to $7 billion (S$10 billion) projected for the whole of 2020. These include Idaho-based Micron Technology which produces dynamic random-access memory, flash memory and USB flash drives.
Though Singapore has always maintained that it would rather Hong Kong continues to thrive as a bigger cake is better for all, some of the windfall could be due to uncertainties over the friendly rival.
“We still see an increasing interest in clients relocating to Singapore,” said Förster. “The city-state is becoming the go-to choice for foreign conglomerates trying to tap the Asian market for multiple reasons, and yes, the shadow casted over Hong Kong is one of them. A big reason, however, is also the soaring interest in the ASEAN market.”
It’s not just businesses but a brain drain that’s at stake. Emigration consultants are fielding hundreds of new calls from Hong Kong residents while some of them are accelerating decisions to buy property overseas, according to this article in South China Morning Post.
“A brain drain will result in a huge drop in service quality in sectors such as travel and hospitality, as a huge number of expats presently still drive these businesses,” observed Antonio Teijeiro, founder, China Hotel Solutions.
There is caution, however, of people getting ahead of themselves, especially when details of the security law, or the privileges that the US will remove, are yet unknown. These privileges include looser visa arrangements, lower US tariffs that make Hong Kong more attractive as a transit point for cargo, and looser controls on US technology imports than counterparts in mainland China, according to this Nikkei Asian Review article.
In fact, the bill could be a good thing for many businesses impacted by protests, such as travel and tourism, F&B and retail, pointed out Benjamin Quinlan, CEO and managing partner at Quinlan & Associates, a Hong Kong-based strategy consulting firm.
“Ultimately, if the legislation can restore a sense of calm to the city, that would be a big plus for travel,” said Quinlan, who was born in Hong Kong. “It would restore the confidence to visit the city and, given Hong Kong’s strong record in containing coronavirus infections, that’s a double plus. We could see a decent uptake in the return of travelers from the mainland, which makes up the vast majority of tourists in Hong Kong.”
But, he agrees that needs to be weighed against the broader geopolitical tensions. “There are so many moving parts, and the uncertainly over how this will all play out is not great for many businesses operating in the city.”
Aviation specialist Shukor Yusof at Endau Analytics is realistic that Hong Kong will inevitably lose some of its dynamism.
“Beijing has no intention of destroying Hong Kong as an international trading hub but has taken a calculated risk in the best interest of China for the longterm. Hong Kong will inevitably lose some of its dynamism, attraction and verve but this can’t all be attributed to China’s heavy-handedness, rather a new world order is in play in the 21st century where the former British colony is less valued as a financial centre than, Shanghai, for example.
“Unfortunately business will be critically impacted, putting immense strain on Hong Kong companies, especially those dependent on the travel such as airlines and hospitality sectors. Further unrest and unrestrained demonstrations will only prolong its pain amid the ongoing pandemic,” said Yusof.
Dezan Shira’s Förster is equally grim about Hong Kong’s tourism prospects, saying its airport is barely operating, its flag carrier Cathay Pacific has had mass layoffs, and its ‘oftentimes disproportionately-priced hotel industry” has seen unprecedented challenges since the start of the trade war, protests and pandemic.
“The upcoming uncertainties Hong Kong has to face will accelerate its downfall and might cause the city to lose its status as Asia’s world city, financial hub and, consequently, travel hub,” said Förster. “Alternatives are in the vicinity to swiftly fill the gaps. Mainland China, heavily relying on domestic tourism, is already back on its feet. Not to forget, some Hong Kong travel players, such as Mandarin Oriental [Hotel Group], benefit strongly from their presence in the mainland.
“In short, the China travel industry will not feel a dramatic impact from this, at least not directly. Its reliance on international travel is too low. Hong Kong will be the big loser in the short and long term. If a travel bubble between Hong Kong, China and let’s say Vietnam or Singapore emerges soon, it might give some Hong Kong businesses that depend on travelers the crucial cash injection needed for survival.”
He does not think that Hong Kong’s legacy hotel chains such as Mandarin Oriental or New World would relocate their headquarters to mainland China anytime soon. “They can still benefit from the Chinese market, repatriate profits or reinvest them in other projects in the mainland. They might shift an increasing chunk of their management and internal operations to China but Hong Kong’s tax regime is nevertheless very attractive,” he said.
According to Förster, there are nine “classic” advantages for setting up a business in Hong Kong: low taxes, free flow of information, a world-class infrastructure, traditional gateway to China, rule of law, clean and corruption-free governance, liberal economy, skilled workforce and an international lifestyle.
But they are being chipped away.
“Hong Kong’s tax regime is still an important incentive for many businesses. There is basically no capital gains tax, VAT [Value Added Tax] or sales tax in Hong Kong and that is likely to remain unchanged, even amid the choppy waters the city is facing. The free flow of information is also a reason to stay in Hong Kong, at least in the short term.
“Many investors who want to tap the Chinese market don’t need to set foot in Hong Kong anymore. Also from a tax perspective, preferential rates can be obtained directly now because of the fact that an increasing number of countries are signing double-taxation agreements with China. So being the traditional gateway to the mainland might become obsolete.
“Further down the line, Hong Kong’s traditional rule of law, fair international arbitration and attractiveness as a safe harbor for both businesses and expats might be under most threat.”
Endau Analytics’ Yusof summed up: “Let there be no doubt: Hong Kong’s future isn’t gong to be determined by the U.S. or the UK, but by China.”