HONG KONG -- Kelvin Lam, an economist in Hong Kong, recently started job-hunting after resigning from a well-known foreign investment bank. The 40-year-old wants a position where he can write about China's economy freely and without fear.

Lam is looking for opportunities in cities such as Tokyo and Singapore; he feels that the tightening grip of China on Hong Kong is making analysts' work more difficult. "Our job ... is to let the rest of the investment community know what their decisions should be, given what we know about the actual situation," Lam says.

He is concerned that analysts in Hong Kong might face the same dilemma as their mainland counterparts, who have been told to take into account the interests of the Communist Party and the state when writing research reports. In November, at the urging of the country's top securities regulator, dozens of mainland economists signed a self-discipline agreement. Lam says the move had a "chilling effect" on the finance community in Hong Kong.

Lam's fears have intensified since a recent Hong Kong government proposal to amend existing extradition laws to allow suspects to be sent to countries with which Hong Kong has no extradition treaty, including China. Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor was forced to suspend the controversial bill indefinitely on June 15, after multiple protests -- one of which saw 1 million people take to the streets -- and a day of violent clashes between police and demonstrators.

The amendment has raised concerns about Hong Kong losing its much-cherished independent judiciary. Critics say the territory's inevitable integration into mainland China will eventually wipe out the unique characteristics that have fostered its success, sparking an exodus of talent, businesses and capital.

Hong Kong police and protesters clashed violently on June 12 as anti-extradition demonstrators took to the streets. © Reuters

In theory, Hong Kong enjoys freedoms of speech and assembly and a high degree of autonomy under the "one country, two systems" framework that came into effect following its 1997 handover to China by the U.K., but only until 2047. After that, there is no guarantee Hong Kong and China will have separate political systems.

Activist investor and longtime Hong Kong commentator David Webb says in a recent article on his webb-site.com: "The more that the PRC Government interferes with the autonomy promised to Hong Kong the more likely it becomes that foreign governments ... will withdraw their recognition of Hong Kong as a separate customs, tax and legal territory within China."

Up to now, business has continued to flourish in the former British colony, thanks to favorable policies, a low tax regime, and an independent judiciary. But the government's attempt to rush the extradition amendment through the Legislative Council has made businesses and residents alike realize that the rule of law may not always be guaranteed, and personal rights and assets could be placed increasingly within the reach of the Communist Party and the state apparatus it controls. Few are convinced by Chief Executive Lam and China's leaders' insistence that the proposal was initiated by Hong Kong, not the mainland.

While many countries and states have extradition treaties, the possibility of people in Hong Kong -- including foreign residents and even visitors -- being handed over to China is particularly controversial; many say fair trials in China's Communist party-controlled courts would be unlikely. Critics also say the amendment would have opened a backdoor in Hong Kong's common law system, potentially allowing Beijing to seek extraditions for political reasons.

Above, Hong Kong Chief Executive Carrie Lam apologizes at a press conference on June 18, having vowed to indefinitely suspend the bill. (Photo by Ken Kobayashi) Below, protesters wearing black shirts march to demand Lam's resignation. (Photo by Kosaku Mimura)

Carson Block, founder of San Francisco-based Muddy Waters Research, which focuses on exposing fraudulent accounting practices at Chinese companies, says he would be "very hesitant" to travel to Hong Kong if the amendment became law.

Apart from industries that are directly exposed to China-related political risk, businesses in general are worried about Hong Kong as a safe and free base for operations. "The business community will be very concerned about the political fallout from this matter and will be wanting to see some resolution quite quickly," says George Cautherley, a businessman and member of the public policy think tank Hong Kong Democratic Foundation, referring to the ongoing protests.

In a snap poll conducted by the American Chamber of Commerce in Hong Kong between June 12 and June 18, more than three-quarters of members who responded said they were "very concerned" about the extradition amendment. Sixty percent said they took seriously the possibility that the U.S. and other countries would reconsider Hong Kong's legal and trade status if the bill moved ahead, and 72% said global companies would be more likely to move regional headquarters out of Hong Kong.

Separately, more than 50% of 98 startups surveyed by the Hong Kong Business Association of Sustainable Economy said they would review whether to remain in Hong Kong if the extradition bill came to pass. More than 70% said the amendment would have negative implications for their businesses.

"Businesses are growing less willing to trade off the security of their assets and their executives against Hong Kong's low taxes and convenient money movements," according to analysts at Hong Kong-based J Capital Research in a report released June 17, one day after 2 million people, more than a quarter of Hong Kong's population, demonstrated to demand that Chief Executive Lam resign. The analysts warn that the city's benchmark Hang Seng stock market index, real estate prices and currency peg to the U.S. dollar "may not crater but will certainly erode over the medium term" as Hong Kong has become "less transparent and more unstable."

Shifting assets and attitudes

Some affluent residents are exploring ways to move assets out of Hong Kong. "For those clients who were already unsure of whether Hong Kong offers a safe legal environment, the recent controversy surrounding the extradition bill has only served to reinforce their concerns," says Timothy Loh, managing partner at Hong Kong law company Timothy Loh.

Loh, whose clients include family offices, asset managers and executives, says the proposed amendment sparked client enquiries about establishing contingency operations outside of Hong Kong as well as moving assets overseas.

Hong Kong has been a popular destination for mainland investors, but "their attitude has clearly changed," says Johnny Chan, director at a financial services company in Hong Kong. He notes that his mainland clients seem increasingly inclined to diversify investments away from Hong Kong to avoid China-related risk. Japanese properties are a popular choice, he says.

He cites one part of the amendment as especially troubling: A proposal for Hong Kong to provide legal assistance to mainland authorities, clearing the way for Beijing to ask Hong Kong authorities to search, seize and freeze assets, and render documents.

A People's Liberation Army member raises the Chinese flag at the 1997 handover of Hong Kong from Britain. © Reuters

Chan is also concerned about his own safety and freedom: "I travel to China for work all the time. I am fine with using the mainland way [of doing business] when I am there, but if the bill becomes law, does that mean that I have to change my way of life in Hong Kong as well?" he asks. "This is something that I am extremely unwilling to accept."

Meanwhile, publishers of politically sensitive books are feeling the pressure. "Publishing books is seen as dangerous profession here," says Bao Pu, founder of New Century Press. His company recently released a book revealing the speeches of top Communist Party leaders and internal discussions in the aftermath of the 1989 crackdown on the Tiananmen Square student protests. "Chain stores refuse to sell any of them," Bao says, adding that the book could be his company's last. "It is practically over."

The property market also experienced fallout from the mass protests. Freddie Wong Kin-yip, chairman of Midland Holdings, one of the city's largest property agencies, says transactions "almost stagnated" from June 8 to June 18. Sales of new houses dropped more than 60% in the first 17 days of June, compared with the same period in May. Only 22 luxury houses with a value more than 50 million Hong Kong dollars ($6.4 million) sold during the period, down from 34 the previous month. The tensions had "a very big impact on the property market," he says.

Hong Kong developer Goldin Financial abandoned a successful HK$11.1 billion offer for a parcel of land in Kowloon in Hong Kong on June 11, citing "social contradiction and economic instability" and forfeiting a deposit of HK$25 million. The move came on the heels of violent clashes between protesters and police outside government headquarters.

Meanwhile, Taiwan properties are gaining traction with Hong Kong buyers, and the political uncertainties are expected to accelerate the trend. "The Hong Kong extradition protests will likely trigger another wave of Hong Kong and Macao people to move to Taiwan," says Chen Jie-Ming, research director at Taiwan real estate platform Ubee. "Those who have either temporary or permanent resident credentials [in Taiwan] are all potential buyers," he adds.

In 2008, 2,940 people from Hong Kong and Macao had either temporary or permanent residency in Taiwan, according to the Ministry of the Interior's National Immigration Agency; by 2018 that had more than doubled to 6,556. In 2014, when Occupy Central, a large-scale civil disobedience movement that was also dubbed the Umbrella Revolution, paralyzed key districts for 79 days, the number spiked to 8,203.

But mainland billionaire Chen Hongtian, who bought a HK$2.1 billion home on Hong Kong's elite Peak in 2016 and owns other properties in the city, says he is not concerned. "It's normal to have some disturbances," says Chen, who is a member of the Chinese People's Political Consultative Conference, or CPPCC, the nation's top political legislative advisory body. "The central government wants Hong Kong to be successful; Hong Kong will be successful," he says.

"The central government wants Hong Kong to be successful; Hong Kong will be successful" Chen Hongtian, property developer and CPPCC member

Since the handover in 1997, businesses in Hong Kong have become more intertwined with mainland China, both commercially and politically. Many top executives of big Hong Kong companies seek positions within China's political machinery, as allegiance to Beijing can help advance their interests on the mainland and provide political security in an opaque legal system.

Peter Lee Ka-kit, co-chairman of one of the city's largest developers, Henderson Land Development, is a member of the CPPCC as well as vice chairman of China's largest chamber of commerce, the All-China Federation of Industry and Commerce. In May, Lee openly supported the government's decision to press ahead with the extradition amendment.

Above, messages of protest paper Hong Kong government offices. Below, a businessman passes an anti-extradition banner in central Hong Kong. Since 1997, local business has become more closely intertwined with the mainland, commercially and politically. (Photos by Ken Kobayashi)

Those without political leverage on the mainland must rely on Hong Kong's independent judiciary, but there are signs it is eroding. The territory suffered a sharp decline in its "judicial effectiveness" score in the 2019 Index of Economic Freedom published in January by the Heritage Foundation, a Washington-based think tank. While the city retained its long-held crown as the world's freest economy, regional rival Singapore narrowed that lead. Hong Kong received a 75.3 rating in judicial effectiveness, down nine points from last year. The same score for Singapore edged up to 92.4. The think tank highlights Beijing's stated prerogative "to make final interpretations of the Basic Law [Hong Kong's de facto constitution], effectively limiting the power of Hong Kong's Court of Final Appeal."

"The foreign business community is far more concerned about encroachment on Hong Kong's legal system than they were over the electoral reforms at the heart of the 2014 Occupy Central movement," says Eurasia Group, a political risk consultancy, in a recent research note. "They are asking themselves if Hong Kong is still the legal barrier it once was, as space to undertake business in Asia without threat of Beijing's arbitrary reach."

Other horizons

Amid the rising political tensions, many of the city's young and talented are seeking opportunities elsewhere. According to a 2018 survey by the Chinese University of Hong Kong, 51% of 18-to-30 year olds are thinking of leaving, up from 45.5% in 2017.

Jonathan Chan gave up his plan to be a journalist after graduating from a local university. Instead, he went to study data science last year in Canada, where he hopes to remain. "I wanted to leave the political environment in Hong Kong," the 24-year-old says, adding that being a journalist is no longer a "viable" career choice given that the city's press freedoms are increasingly hampered. "What happened recently [over the extradition amendment] makes me feel that I made the right decision," Chan says.

Some executives are also wondering whether Hong Kong is the best place to be. A mainland insurance professional who would reveal only his surname, Wang, came to Hong Kong in 2005. But as his two children grow, the 36-year-old is considering moving to a more pluralistic society. He cites the rising social conflicts in Hong Kong and the erosion of its freedoms. "I grew up in a centralized society on the mainland. I don't want my kids to also experience that," he explains.

Businesses are asking themselves if Hong Kong is still a "space to undertake business in Asia without threat of Beijing's arbitrary reach," says a recent note from consultancy Eurasia Group. (Photo by Ken Kobayashi)

Lee Quane, regional director at human resource consultancy ECA International, says Hong Kong risks losing its appeal to global talent. If there is "more political instability ... and greater risks to the rule of law it will obviously narrow the gap [of attractiveness] between Hong Kong and mainland cities," Quane says. Multinational companies may need to provide a so-called hardship allowance to encourage staff to relocate to Hong Kong, as they do the mainland, he says.

In Hong Kong's favor, however, is the fact that few cities in the region can beat its ease of doing business, says Quane. "Other locations have their own risks," he adds. For example, Japan does not have the most transparent judicial system -- a reality underscored last year by the high-profile arrest of Carlos Ghosn, former chairman of carmaker Nissan Motor, on charges of financial wrongdoing, which Ghosn has denied. Concerns about judicial and political freedom also apply to Singapore, says Quane.

James Thompson, founder and chairman of global relocation agency Crown Worldwide and a four-decade resident of Hong Kong, agrees. "International businesses will not leave Hong Kong for this," he says. "There are few places that would offer more advantages than Hong Kong in the Asia-Pacific region."

Nikkei staff writer Coco Liu, deputy editor Dean Napolitano and Nikkei Asian Review chief business correspondent Kenji Kawase in Hong Kong, and staff writer Cheng Ting-Fang in Taipei contributed to this report.