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Hong Kong lawmakers passed a bill that includes heavy punishments for foreign interference endangering national security and criminalizes the possession or disclosure of state secrets, measures that some foreign executives say could make the city less attractive for international business.

The city’s legislature, overhauled by Beijing in recent years to shut out opposition, passed the new law which outlines offenses such as espionage and treason, and widens the meaning of national security to include economic matters. The law, known as Article 23, also expands the range of material considered state secrets, such as those concerning social and technological developments.

The definitions bring Hong Kong more in line with mainland China, where a crackdown on business due-diligence firms has unnerved some foreign companies. It supplements a national-security law that Beijing imposed on Hong Kong in 2020 in the wake of mass antigovernment protests.

The new law has drawn strong criticism from Western governments who say it risks further undermining freedoms in the city, and a group of U.S. lawmakers sent a letter to Secretary of State Antony Blinken last week saying it raised the risks for American citizens and businesses.

On the ground, foreign business groups and corporate lawyers are more measured, but some say they are concerned that some parts of the bill are so vaguely worded they raise the perception of risk-and-compliance costs for businesses.

“Part of the unique value Hong Kong has for Western stakeholders is the openness of the city and we feel the balance between openness and the desire for security needs to be well calibrated,” said Johannes Hack, head of the German Chamber of Commerce in Hong Kong.

Hong Kong’s Chief Executive John Lee said earlier this month that he had asked the legislature to scrutinize and pass the bill at full speed, so that the city “can then focus its efforts on developing the economy.” A spokesman for Hong Kong’s government said that the bill “targets an extremely small minority of people who endanger national security” and that normal business operators won’t be affected by the legislation.

Confidence in Hong Kong among foreign businesses and executives has been shaken in recent years amid social unrest, strict pandemic rules, China’s sputtering economy and a national-security crackdown. A range of multinational companies have left, moved regional executives or downsized their operations in Hong Kong, including a number of firms that gather business intelligence.

The number of regional headquarters of firms based outside Hong Kong continued to fall in 2023, including those from the U.S., U.K. and Switzerland, according to data from the Census and Statistics Department.

Several foreign business leaders in Hong Kong say that while they don’t see a second national-security law as a reason to rethink their presence in the city, it reinforces existing concerns about the city’s appeal as a global financial center and hinders attracting global talent.

The law will take effect on Saturday.

During the public consultation, Hong Kong’s top officials, including its security and justice chiefs, met with the leaders of global business chambers to reassure them that the law wasn’t taking aim at businesses, according to people familiar with the meetings.

Officials dismissed questions about whether the government had analyzed the new law’s potential impact on businesses, saying it wouldn’t increase their compliance costs, attendees at one of the meetings said.

At another meeting with a top Beijing official overseeing Hong Kong affairs last month, representatives chosen by organizers to share the views of the international business community voiced no criticism about the security law and Hong Kong’s business environment, some attendees said. The meeting appeared tightly managed and not all foreign business leaders had an opportunity to frankly share their concerns, they said.

Sections of the bill to which the international business community expressed the most concern—the broad definitions of state secrets and external interference—remained almost identical to the initial consultation paper.

Companies might refrain from certain activities in future due to perceived risks, said the German chamber’s Hack, adding that executives at foreign headquarters will find it harder to see how the city is different from the rest of China.

The head of another European business chamber said companies will have to think twice when running business due diligence owing to concerns over violating state secrets laws. One consulting firm said it wouldn’t take on government work to avoid potentially coming into contact with state secrets.

The draft law also targets threats from external forces and offenses will carry heavier jail sentences if they were found to be committed in connection with foreign forces.

The U.S., European Union and the U.K. have accused Hong Kong of rushing through a bill that risks further eroding freedoms in a city where dissent has been all but wiped out and scores of political opponents—activists, former lawmakers and media workers—jailed.

The U.S. will look carefully at the law to understand implications for American citizens, investments and companies operating in Hong Kong, a spokesperson for the U.S. Consulate General said.

Hong Kong’s government has hit back strongly at criticism from foreign governments and condemned unfavorable articles in the foreign press, saying they are attempts to scaremonger or smear the city’s security laws. More than 98% of over 13,000 submissions it received during a four-week consultation, including many from the business sector, have positive comments, the government spokesman said.

“Enacting laws on safeguarding national security is an inherent right of every sovereign state,” he said. “It is outrageous to single out Hong Kong and suggest that businesses would only experience concerns when doing business here but not in other countries.”

Regina Ip, a legislator and former security minister, said foreign firms didn’t need to worry as state secrets aren’t information that any ordinary individual or entity could easily have access to, unless bought or gained by hacking or stealing.

Ip led government efforts to enact similar national-security laws more than 20 years ago, but that bill was shelved after intense opposition that it threatened the city’s civil liberties. An estimated half a million people took to the streets to protest in the summer of 2003.

This time around, public opinion has been muted, highlighting the impact of Beijing’s crackdown on dissent. The main protest was held by three members of the city’s last surviving opposition group, surrounded by dozens of police officers.

Source: March 20, 2024 | By Selina Cheng