China Economy

Hong Kong extradition law could jeopardize special economic agreement with the US

Key Points
  • Protesters have taken to the streets in Hong Kong over the last few days, calling on the government to drop a proposed change to the city's extradition rules.
  • The United States and European Union have released statements saying they share concerns about the potential legal amendment. 
  • Experts say ongoing protests may jeopardize Hong Kong's reputation as a global financial center.
  • Some banks in Hong Kong's Central District have suspended branch services and permitted staff to work from home.
Protesters occupy a main road and walkways during a rally against a proposed extradition law in Hong Kong on June 12, 2019.
Paul Yeung | Bloomberg | Getty Images

Protests against a proposed change to Hong Kong's extradition policy continued on Thursday as several thousand protesters demonstrated in the streets — undeterred by the tear gas and rubber bullets police fired at them a day earlier.

The mass political demonstration has already had an impact on business in the city.

Local government offices in the city's financial district have shut down for the rest of the week after several days of protest.

For their part, major international banks including Standard Chartered, Bank of China and DBS said they had suspended branch services in the city's central business district area until further notice. For many financial firms based in the Central district, it was business as usual — but many offered staff the option of working from home.

Meanwhile, Hong Kong's equity benchmark, the Heng Seng Index, slid 1.5% in early trade on Thursday, extending losses from Wednesday afternoon as tensions escalated.

Beyond just the effects of this week, the mass political demonstration has raised long-term concerns about the future of doing business in the territory.

Concerns for the local business community

The Hong Kong General Chamber of Commerce released a statement in March indicating its distress about the city government's proposal to allow extradition to several places — including mainland China — where it does not currently have obligations to send those accused of crimes.

While such a system may not sound like a problem for companies, many have expressed concern that it will undermine Hong Kong's rule of law, and subject those doing business in the city to Beijing's whims.

Those "new arrangements," according to the chamber, "will reduce the appeal of Hong Kong to international companies considering Hong Kong as a base for regional operations."

Such an overt opposition surprised some because the American Chamber of Commerce, and the local business community more generally, tends to avoid direct statements criticizing mainland China and Hong Kong's relationship.

When asked for comment on the latest developments in the city, the Chamber of Commerce said Thursday it has nothing to add beyond its March statement.

But not every business group is against the bill.

In a statement released on Thursday, The Hong Kong General Chamber of Commerce said it agrees with the underlying principle of the extradition bill. However, it added, the large-scale demonstrations and protests show that the community still has serious apprehensions.

"We sincerely urge the Government to continue to listen to stakeholders and engage in meaningful dialogue with the public," Aron Harilela, HKGCC chairman, said in the statement.

Still, it's significant that some businesses are speaking out against the extradition changes.

Joseph Cheng, co-founder of Power for Democracy, a pro-democracy political group based in Hong Kong, said the American Chamber of Commerce adopting "a public position against the Chinese authorities" is not only "rare," but also very "significant" for the local business community.

That sentiment was echoed by Ho-Fung Hung, a professor in political economy at Johns Hopkins University. Speaking with CNBC's "Street Signs" on Thursday, he said an amendment to the extradition policy could jeopardize not only the territory's reputation as a financial center but also its special economic status with Washington.

"What is practically worrying me is that Hong Kong always enjoyed a special trading status according to U.S. law, which is the U.S.- Hong Kong Policy Act, that separates Hong Kong from mainland China in many economic and diplomatic issues," he said.

For one, U.S. Speaker of the House Nancy Pelosi suggested that Hong Kong may, if the extradition changes are made official, no longer be "sufficiently autonomous" to justify a special trade arrangement between the territory and the United States.

What makes Hong Kong companies different from Chinese companies, he added, is that they have more access to U.S. and other countries' markets due to the special agreement.

International responses to the protests

The demonstration has attracted international attention.The European Union said in a statement that it shared many of the concerns raised by citizens of Hong Kong regarding the proposed extradition reforms and called for an in-depth inclusive public consultation to move forward.

"This is a sensitive issue, with potentially far-reaching consequences for Hong Kong and its people, for EU and foreign citizens, as well as for business confidence in Hong Kong," it said.

Protesters cheer and make way for other demonstrators pushing a ladder cart outside the Legislative Council during a protest against a proposed extradition law in Hong Kong, China, on June 12, 2019.
Bloomberg | Getty Images

Meanwhile the United States Consul General in Hong Kong, Kurt Tong, described worries in the foreign community, including businesses, as "palpable" in an interview shown in May on public service broadcaster RTHK.

"We sense real concern about this, " Tong said, adding that unease is compounded by a lack of "careful explanation."

But Bruce Lui, senior lecturer at Hong Kong Baptist University said that the local government and Chinese government wont budge on this and the bill will "definitely be passed in weeks."

"The Beijing policy in Hong Kong is trying to weaponize law as a means to have total control in Hong Kong," Lui told CNBC, adding that the proposed extradition changes are fundamentally a "test of the authority" of Chinese leader Xi Jinping.

–Reuters, and CNBC's Vivian Kam and Kelly Olsen contributed to this report.