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Is this the end of Hong Kong as global financial centre?

The United States could be close to terminating its special economic and trading relationship with Hong Kong.

Experts say losing the status won’t cause an immediate exodus of big western companies from the global financial hub, but it could further erode what made Hong Kong so attractive in the first place.

The latest blow to the city’s reputation came after US Secretary of State Mike Pompeo said Wednesday that the country no longer views Hong Kong as sufficiently independent from China, which for more than 20 years has governed the city as a semi-autonomous region with freedoms not available on the mainland.

Pompeo’s announcement is not a surprise. He warned last week that a new national security law China has planned for Hong Kong — which is expected to ban sedition, secession and subversion against Beijing — would be a “death knell” for the autonomy the former British colony was promised.

The declaration doesn’t change anything right now, though it does suggest that Washington could revoke the special status it granted the city in 1992. Late last year, US lawmakers passed legislation that linked the arrangement to an annual review of Hong Kong’s unique political and legal freedoms.

The status has its economic perks: During the US-China trade war, for example, it allowed Hong Kong to avoid the tariffs that Washington imposed on Chinese goods.

But the trading relationship between Hong Kong and the United States is far less valuable than the other business opportunities the city affords foreign firms, such as the ability to operate without restrictions encountered elsewhere in China.

Beijing regulates everything about how a foreign company does business in the mainland, from how much capital they can invest there to how large of an ownership stake they can hold in their own business ventures.

That makes Hong Kong a more suitable staging ground for firms that have an interest in the region.

“Hong Kong has become one of the latest battlegrounds for the US-China power game,” said Ronald Wan, chief executive of Partners Capital International, a financial services firm based in Hong Kong. “Trade is just a small part of the story.”

The United States imported nearly $17 billion in goods and services from Hong Kong in 2018, while exporting $50 billion — a trivial amount compared to the nearly $740 billion in goods and services traded that year between the United States and China.

Applying Chinese tariff rates to Hong Kong exports would “have a limited direct impact on the US firms operating in the territory” because of how little is exported, wrote analysts from Eurasia Group in a Wednesday research note.

They added that it’s unlikely the United States would ditch its relationship with Hong Kong in full, though.

“US companies are invested in Hong Kong as an access point for the region,” the analysts wrote. “Losing its special status would also hurt Hong Kong more than Beijing, further straining an already struggling economy while doing little long-term damage to Beijing’s plans.”

A more troubling risk is that the loss of that special status could lead Washington to restrict Hong Kong’s access to sensitive American technology, according to Capital Economics.

Such products comprise only 5% of Hong Kong’s total imports, researchers at the firm wrote last November. But they said that “restricting the ability of Hong Kong-based firms to source sensitive products would remove one of Hong Kong’s distinct advantages as a business location relative to mainland China.”

That concern also points to a broader fear: If the United States starts treating Hong Kong as it treats China on trade, it eventually could reconsider the way it looks at the city entirely.

“The short-term economic damage would be manageable,” the Capital Economics researchers said. “But it would accelerate the erosion of Hong Kong’s status as an international business center.”

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