Minxin Pei explains the leverage the US has over China in the ongoing protests in Hong Kong against the extradition law. The US Congress passed the US-Hong Kong Policy Act in 1992 in recognition of the former British colony’s special status after it returned to Chinese rule in 1997. It aimed to allow the US and Hong Kong to maintain their bilateral cooperation, and deep economic and cultural interests there.

Under the provisions of the 1992 act, Hong Kong is being treated as a “separate entity from mainland China” with its own political, legal and economic system. It must maintain a sufficient degree of autonomy under the “one county, two systems” framework to justify continued special treatment by the US for “economic and trading privileges, such as continued access to sensitive technologies and the free exchange of the US dollar with the Hong Kong dollar.”

The author warns the leadership in Beijing against pushing through the controversisal extradition bill, because it will “irrevocably tarnish the city's rule of law and its attractiveness as an international commercial hub.” This would be the case should hardliners in the US insist that Congress repeal its recognition of that status as a way of punishing the pro-Beijing government in Hong Kong, whose value as a financial centre will be “fatally impaired.”

The standoff over China’s control in Hong Kong may play into Trump’s trade war with Beijing. The act explicitly empowers the US president to “issue an executive order suspending some or all of Hong Kong’s privileges if he asserts that “Hong Kong is not sufficiently autonomous to justify treatment under a particular law of the United States.” Trump said he would hold up a trade deal with China, after threatening to raise tariffs on Chinese goods if President Xi Jinping did not meet with him in Osaka on the sidelines of the G 20 summit in Japan later this month.

The author points out how revoking Hong Kong’s special status would hurt China, punishing its state-owned companies, tycoons and officials who use Hong Kong as an offshore financial centre, and a door to the global system of finances. An escalating trade war would create “regulatory and legislative hurdles,” making it “harder for Chinese companies to raise capital in the US.” Without access to capital, the valuations of Chinese state-owned enterprises listed on Hong Kong’s stock exchange “will fall.”

The author points out that “even if the US does not take this punitive step, China will reap what it has sowed, given the high price it has to pay. However the move would also undermine the political and economic interests of foreign governments and businesses in Hong Kong, as well as punish local citizens who would suffer from the inevitable financial fallout.

Ever since the “Umbrella Movement” in 2014, the pro-democracy protests attracted global attention. No doubt, China’s leaders are “aware that the outside world is watching current developments with great alarm.” It remains to be seen whether Xi puts jingoism before economic interests, accepting “disastrous consequences” in return for not budging an inch.