Press "Enter" to skip to content

Is This The End of ‘One Country, Two Systems’ Between China & Hong Kong?

One Country, One System?

China could change its “one country, two systems” arrangement that has been in place since 1997. The agreement stipulates that the United States is legally bound to treat Hong Kong separately from mainland China for matters concerning trade and economic policy. With troops from the mainland at the border of Hong Kong, the protests and trade war could escalate.

Hong Kong’s growth as an emerging wealth management center depends on the extent China tolerates the development. With Shanghai, Beijing, and China generally becoming an important onshore wealth management centre, the importance of Hong Kong to China lessens.

Reuters reports that financial advisers, bankers, and lawyers familiar with the situation cited concerns over the local government’s extradition of suspects to China. “The fear is that the bar is coming right down on Beijing’s ability to get your assets in Hong Kong. Singapore is the favoured destination,” said one advisor.

The extradition bill could threaten the one-state two system approach so crucial to Hong Kong’s international financial status.

Professor Simon Young, who works with the University of Hong Kong law school, points out that, if the extradition bill becomes law, mainland Chinese courts will be able to request Hong Kong courts freeze and confiscate assets related to mainland crimes. A provision already exists for proceeds from drug offenses.

“This has been largely overlooked in the public debate but it is really a significant part of the proposed amendments,” Young said. “It may not have been overlooked, of course, by the tycoons and those giving them legal advice.”

“These aren’t mainland Chinese clients who might be politically exposed, but wealthy Hong Kong clients,” the head of private banking at an international bank in Hong Kong said. “The situation in Hong Kong is out of control. They can’t believe that Carrie Lam or Beijing leaders are so stupid that they don’t realise the economic damage from this.”

The extradition bill also removes restrictions on the mainland from the Mutual Legal Assistance in Criminal Matters Ordinance, MLAO. A Hong Kong Bar Association study says MLAO allows foreign jurisdictions to request Hong Kong authorities to gather evidence for use outside the city “and to render other forms of assistance, such as freezing and confiscating the assets of persons wanted for crimes in other jurisdictions.”

Hong Kong has long been recognised as an offshore banking center, but since protests and the US-China trade war, Hong Kong is in its first recession in a decade. Since the protests started in earnest in early June, Hong Kong stocks have lost billions.

Hong Kong’s wealth management center had enjoyed a growing client base in the lead up to Hong Kong’s sustained protests and the US-China trade war. According to Deloitte, Hong Kong gained more assets than any other financial center between 2015 and 2017. The Bank for International Settlements calculates that Hong Kong oversaw $437 billion in foreign exchange transactions in 2016.

The US-China trade war also increases the chances of a contraction for the full year compared with 2018, and contribute to a reworking of the current one country, two system arrangement.

Iris Pang, the greater China economist at ING, believes the trade war is currently the most damaging factor to Hong Kong.

“A cooling global and Chinese economy, the trade war and local political unrest are really the triple whammy that Hong Kong is facing right now,” said Gary Ng, an economist at Natixis.