Hong Kong could see a "gradual erosion" of its status as a financial hub in the next five years, according to Orient Capital Research's Andrew Collier.
A cloud of uncertainty hangs over the city after China's national security proposal sparked a fresh wave of protests in the embattled territory,
"I'm very concerned," Collier, who is managing director at the firm and based in Hong Kong, told CNBC's "Street Signs" on Thursday before the proposal was approved. "I've been here for 12 years and I'm probably gonna be here for another 10 and I'm getting very nervous about the whole situation."
"I think Hong Kong is a very risky place to do business," he said. "Clearly, if the mainland authorities come in and have to have draconian methods for stopping the protests, that's gonna be very bad optics globally for Hong Kong and investors are not going to be comfortable in that situation."
That comes as the "nuclear option has been pulled" by both the U.S. and China, Collier said.
On Wednesday, U.S. Secretary of State Mike Pompeo told Congress that Hong Kong was no longer autonomous from China, raising questions over the special administrative region's favorable trade relationship with the U.S. Pompeo's comments also open up the possibility of sanctions on Chinese officials.
Pompeo's comments came on the back of a proposed law from China's National People's Congress that would effectively bypass Hong Kong's own legislature and targets acts of sedition against the central government in Beijing. That development came after Hong Kong was rocked by months of anti-government protests in 2019 that often degenerated into violence and left public infrastructure damaged.
China's NPC, the country's parliament, approved the proposal Thursday afternoon. It will now be sent to the smaller decision-making Standing Committee which will work out the details and finalize the legislation.
Looking ahead, Collier said certain larger investment funds will likely "face pressure from the retirement funds" about why they're continuing to invest and do business in Hong Kong despite its "declining rule of law." In mid-May, U.S. President Donald Trump and the Labor Department directed a board in charge of federal retirement dollars to stop plans to invest in Chinese companies.
The analyst also added that the mainland Chinese city of Shenzhen would "continue to make a land grab" for some of the yuan trades as well as the inward and outward flows.
"My feeling is that you're gonna have a big impact on the security law in Hong Kong in the financial sector, but China's going to make sure that some of the visible aspects of Hong Kong like the High Court and like the (Hong Kong dollar peg to the greenback) are still intact," he said.
"I don't think Xi Jinping wants to see a lot of failure on that front," Collier said.
— CNBC's Tucker Higgins contributed to this report.
This story has been updated to reflect that since the article's publication, Beijing has approved the national security bill for Hong Kong.