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July 14, 2020

HONG KONG: National Security Law impact – breakdown by sector (1)

BY Gabriel Wildau

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  • The National Security Law (NSL) gives Hong Kong and mainland authorities a powerful new set of legal and enforcement tools, but it remains unclear how or whether these tools will be applied.
  • Large-scale exodus of multinational business from Hong Kong is unlikely unless or until authorities demonstrate that risks from the NSL are more than just theoretical.
  • More likely than exodus is a muddling-through in which business continues largely as normal, at-risk individuals and groups exit, and those who remain act more cautiously to avoid red lines.

This series will analyze the impact of the NSL on various sectors in Hong Kong and beyond. The current note examines financial services and travel and transit. Part two will examine non-financial companies and journalism, social media, and civil society. The executive summary covers both parts. See also our overview of the law and initial warning on risks to business.


  • Among specific sectors, journalism, social media, and civil society are most at risk from the NSL. Even in the muddle-through scenario, NGOs and activist organizations will disband or stop accepting foreign funding.
  • On the other side of the spectrum, financial services is the least vulnerable, due to the role of Chinese companies in anchoring Hong Kong’s financial services industry.
  • In between these two poles is the city’s role as a transit hub and destination for business travel. Most travel will continue as normal, but certain political activists, NGO personnel, and even some foreign executives may avoid travel to Hong Kong. As previously mentioned, operational security measures for mainland China should be extended to Hong Kong.
  • Non-financial corporates may reallocate parts of their Asia operations that do not directly serve mainland China, while relying more on mainland or Hong Kong personnel, rather than expatriates, to staff their China-focused operations in Hong Kong.

Financial services


Hong Kong’s advantages over rival hubs Singapore are clearest and most durable in financial services. For US dollar fundraising, Hong Kong’s capital markets outclass the regional alternatives by wide margins based on metrics like fundraising value (both debt and equity), market capitalization, trading volume, and M&A deal value (the Hong Kong Stock Exchange can be viewed as a form of USD finance, given the Hong Kong dollar’s peg to the USD). Tokyo’s stock market is larger by market cap, but its stock and bond markets finance few non-Japanese companies.

A key advantage for Hong Kong is the diversity of companies who access its capital markets. Investment banks can rely on deal flow from mainland Chinese companies as the foundation of their business, while also working on deals from South and Southeast Asia. The same applies to the broader ecosystem of professional services companies that participate in the financial sector, including lawyers, accountants, financial PR, and management consultants. Given that Chinese companies are unlikely to turn away from Hong Kong, they will continue to serve as a powerful anchor for the industry.

Relevant NSL provisions

  • Article 29 defines the crime of Collusion With a Foreign Country to include applying foreign sanctions, provoking hatred towards the mainland government, or stealing state secrets. Aggressive interpretations of these provisions could theoretically be deployed against financial institutions or investment researchers.

Exit scenarios and triggers

  • Prosecution for sanctions compliance. A foreign bank (or individual employees) is prosecuted for Collusion because a foreign bank severs its relationship with a Chinese individual or company that faces sanctions under the Hong Kong Autonomy Act, the Uyghur Human Rights Act, or other US laws and regulations.
  • Prosecution for investment research. A sell-side analyst is prosecuted for publishing research critical of the Hong Kong or mainland government. Even before the NSL, incidents of quasi-censorship of investment research in Hong Kong occurred in recent years. This trend could now escalate. Possible examples:
    • A macroeconomist expresses skepticism towards official Hong Kong unemployment statistics, thereby allegedly sparking “hatred” of the government.
    • A currency analyst expresses skepticism about the true size of Hong Kong’s foreign exchange reserves, allegedly undermining national security by provoking a run on the Hong Kong dollar.
    • An equity analyst publishes a negative view about a prestigious Chinese state-owned enterprise (e.g., raising doubts about financial health, hinting at corruption, or raising product quality concerns).
    • While performing due diligence about a Chinese company on behalf of an alternative asset manager, a business intelligence researcher allegedly uncovers “state secrets.”
  • “Nuclear option” financial sanctions. US financial sanctions that cut off Chinese and/or Hong Kong financial institutions from settling transactions in US dollars would destroy the foundation of Hong Kong’s financial services industry. Such sanctions appear unlikely but cannot be completely ruled out if US-China relations deteriorate sharply.

Muddle-through scenario

Financial institutions will remain in Hong Kong, but analysts and short sellers will become more cautious about what they say in public. Banks will comply with US sanctions targeting specific individuals, while the US refrains from applying Iran-style financial sanctions targeting China.

Travel and transit

Hong Kong International Airport not only receives visitors to Hong Kong but also serves as an important transit point en route to destinations in mainland China and elsewhere in Asia.

Relevant NSL provisions

  • Article 38 asserts extraterritorial jurisdiction, stating that the NSL applies to “offences … committed … from outside (Hong Kong) by a person who is not a permanent resident.”
  • Article 50 establishes the Office for Safeguarding National Security in Hong Kong as a direct branch of the mainland government. The Office is staffed by the Ministry of State Security, China’s intelligence agency, and the Ministry of Public Security, China’s domestic security agency.

Exit scenarios and triggers

  • A Meng Wanzhou-style arrest of a visiting foreign executive in Hong Kong – or during transit through the Hong Kong airport – for activity outside Hong Kong that is construed as a crime under the NSL. Possible examples:
    • A foreign executive who made statements on social media advocating Hong Kong independence is arrested during a stopover at the airport and charged with Secession.
    • While attending a conference in Hong Kong, a visiting NGO staffer from a foreign NGO that allegedly provided funding to an illegal activist group in Hong Kong is prosecuted for Collusion With a Foreign Country.

Muddle-through scenario

Travel continues largely unimpeded, while a few high-risk foreign and diaspora Chinese activists avoid travel to Hong Kong. Mainland and Hong Kong authorities largely refrain from exercising extraterritorial jurisdiction under the NSL.

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