Analysis & Opinions - Belfer Center for Science and International Affairs

The Financial Implications of Deploying Sanctions in Hong Kong

| Aug. 19, 2019

Hong Kong has been gripped by a brave protest movement sparked by Chief Executive Carrie Lam’s proposed Extradition Bill, which, though suspended, has yet to be withdrawn. Though protesters have moderate and measured requests, they have been met with the flagrantly irresponsible use of riot control devices such as tear gas in the Kwai Fong metro station. Police have turned a virtual blind eye to attacks on the press and protesters alike in Yuen Long. The protesters’ persistence has called into question whether Beijing might employ force to end the protests, envisioning another Tiananmen Square crackdown, and how Washington should potentially respond.

Constitutionally, Beijing could activate the People’s Liberation Army Garrison in Hong Kong if requested by the Hong Kong government. Doing so, however, could spark a strong international backlash triggering a harsh multilateral response while igniting anti-mainland sentiments in the city. Considering the effort that Beijing devotes to censoring speech about Tiananmen at home, a similar crushing of dissent in Hong Kong would require draconian lengths, likely overstepping the One Country, Two Systems model. Even more dangerously, Beijing could use the People’s Armed Police, a paramilitary police force within the PLA’s command structure. The group has often been used to crush mainland dissent, like the 2008 protests in Tibet.

It is now more critical than ever that Washington and the international community keep focused on Hong Kong. Although it is difficult to envision the mainland stepping down in any scenario, it is not as if the demands put forth by the protesters drastically alter the power dynamic between Hong Kong and China. The protesters do not seek a fundamental reorganization of the relationship between the mainland and Hong Kong; their demands support the basic foundation of One Country, Two Systems model that the Extradition Bill threatened. These are not political extremists seeking to carve off a piece of China’s territory, but rather ordinary citizens demanding the basic respects afforded by the Hong Kong Constitution.

In response to Beijing’s exaggerated deployment of harsh police activity, some have raised the question of whether Magnitsky sanctions would be appropriate. Contrasted with more powerful sanctions, such as dollar clearing and financing restrictions used against Iran and Russia in the past, Magnitsky sanctions are mostly symbolic. If a symbolic denouncement is indeed the goal, as it was for Saudi Arabia after the killing of Saudi journalist Jamal Khashoggi, Magnitsky sanctions are likely the right tool, as they would send a powerful message of solidarity with protesters to both the Hong Kong and mainland authorities. Still, it is unclear if these symbolic measures will be enough to encourage the compliance of Hong Kong’s government or, more generally, for Beijing to de-escalate.

Since the city’s handover, Hong Kong has positioned itself as a gateway to the tightly-restricted mainland market. Large Chinese enterprises, including major banks, tech giants, and agile startups alike, have pursued listings on Hong Kong’s Stock Exchange to give international investors mainland exposure. The Stock Connect program has allowed foreign investors to access mainland stock markets directly both in Shanghai and Shenzhen and are subject to a daily quota. The related Mutual Recognition of Funds scheme allows Hong Kong-domiciled funds to sell shares to mainland consumers. These factors among others will complicate firms’ decision to shift resources outside of Hong Kong, likely the most meaningful financial consequence from sanctions. 

Yet, while the exit of Western firms for other Asian hubs like Singapore could win the compliance of local authorities with protesters’ demands, it may also conversely feed into Beijing’s long-term plans for Hong Kong. Under the Great Bay Area (GBA) Initiative, Beijing hopes to stitch Hong Kong and Macau closer to other major cities in Guangdong Province. By connecting Hong Kong’s financial system with Shenzhen’s technological prowess, Macau’s tourist appeal, Guangzhou’s logistics, and manufacturing capabilities all throughout the Province, the GBA could rival the gross domestic product of the Tokyo or the New York Bay areas as early as 2030. Over this timeline, the Initiative could come to rival the technological innovation of Silicon Valley and even serve as the testing ground for new cross-border yuan-denominated financial products. Further, the program could spur renewal of the long-stalled push for a more international Renminbi. If Western firms exited due to higher political risk, Hong Kong could be left more economically reliant on the mainland thus strengthening Beijing’s political hand and that of the pro-Beijing faction in the Legislative Council.

There is also the open question of China’s potential responses to US sanctions. In the past, Beijing has meshed its sanctions and trade policies, which has in essence linked compliance with ongoing Iran sanctions to developments in the trade war. In punishing other states in the region, including Taiwan, South Korea, and the Philippines, China has also pursued informal sanctions including trumped-up regulatory violations, consumer boycotts, or tourism bans that are designed to put pressure on governments and important firms. Though China may be reluctant to pressure foreign firms given the state of its economy, sanctions will almost definitely be a factor in trade negotiations in the autumn.

If this is the case, Washington should not take Chinese promises at face value and should not relax sanctions in pursuit of a trade deal. While stabilizing the world’s most important economic relationship should be a key goal of the administration, undermining solidarity with the protesters and the credibility of the Magnitsky sanctions generally would be deeply mistaken. Should the treatment of protesters worsen, Magnitsky sanctions against figures like Deputy Police Commissioner Alan Lau, famed for overseeing the response to the 2014 Occupy Central Movement, as well as mainland figures like Zhang Xiaoming, the head of Beijing’s Hong Kong and Macau Affairs Office, should be imposed.

These sanctions do not serve as a stand-in for a serious, multilateral approach to the problem of China’s human rights record. All sanctions are means to an end, rather than ends in themselves, but it is still unclear whether economic pressure on its own is enough to alter Beijing’s behavior. As the cases of both the Asia Infrastructure Investment Bank and Huawei prove, Washington should not underestimate the benefits and potential pitfalls of a global communications strategy designed to raise awareness about Beijing’s transgressions from international norms. As such, to responsibly address not only Hong Kong but also the full spectrum of Chinese abuses of the international systems, sanctions should not be relied upon as the sole weapon in Washington’s arsenal. Rather sanctions must be used, as a tool used to achieve measured, realistic goals, in tandem with multilateral diplomacy.

Statements and views expressed in this commentary are solely those of the author and do not imply endorsement by Harvard University, Harvard Kennedy School, or the Belfer Center for Science and International Affairs.

Michael B. Greenwald is a fellow at Harvard Kennedy School’s Belfer Center for Science and International Affairs. He is also a senior adviser to Atlantic Council President and Chief Executive Officer Frederick Kempe and an adjunct professor at Boston University. From 2015-2017, Greenwald served as the US Treasury attaché to Qatar and Kuwait.

For more information on this publication: Belfer Communications Office
For Academic Citation: Greenwald, Michael.“The Financial Implications of Deploying Sanctions in Hong Kong.” Belfer Center for Science and International Affairs, August 19, 2019.