Share A LinkedIn icon Share by linkedin An email icon Share by email

KEY POINTS The Hong Kong Human Rights and Democracy Act of 2019, signed into law by U.S. President Donald Trump, is touted by Congress as a way to deter Beijing's influence and interference in Hong Kong's internal affairs.

But if Hong Kong's so-called special status is compromised as a result of the law, the city's economy could be damaged — bringing down with it the U.S. and China.

The U.S. and Hong Kong have a tight trade and financial relationship that's largely built upon the city's trusted position as a relatively safe place to access China.

While Hong Kong's economic growth contribution to China has diminished through the years, the city has remained an important financial center for mainland businesses.

Secondary school students attend a rally at Edinburgh Place in Hong Kong on August 22, 2019. Anthony Wallace | AFP | Getty Images

U.S. President Donald Trump signed into law two bills supporting Hong Kong protesters on Wednesday. The laws were introduced to preserve Hong Kong's rights and autonomy, but one of them actually contains provisions that could end up hurting the economies of the U.S., China and Hong Kong. Trump signed two bills on Wednesday pertaining to Hong Kong: One involves an annual review of the city's autonomy from China; the another bars the sale of munitions to Hong Kong police, such as tear gas and rubber bullets. It is the first — the Hong Kong Human Rights and Democracy Act of 2019 — that could lead to the removal of the so-called special status that Hong Kong currently enjoys, and that could hurt the Chinese territory's economic prospects and businesses that operate there. Hong Kong, a former British colony that returned to Chinese rule in 1997, has seen widespread demonstrations since June, some of which have led to violent clashes between protesters and the police. The protests were initially sparked by a proposed law that would have allowed extradition to mainland China, but the unrest later morphed into broader anti-government demonstrations that include demands such as greater democracy and universal suffrage. The two U.S. laws come amid widespread criticism of heavy-handed treatment of protesters by the Hong Kong police and government, which Beijing supports.

Protecting Hong Kong

The Hong Kong Human Rights and Democracy Act of 2019 include the following provisions: Requiring the U.S. State Department to annually review whether Hong Kong is "sufficiently autonomous" from China to justify its "unique treatment" under U.S. law

Requiring the American president to impose sanctions on individuals found violating human rights in Hong Kong by freezing their assets and denying them entry into the U.S.

U.S. visas to Hong Kong applicants may not be denied because they've been arrested or detained for taking part in pro-democracy protests The bill was touted by Congress as a way to deter Beijing's influence and interference in Hong Kong's internal affairs. But many analysts have said it's largely "symbolic" in nature.

"I think it's (a) significant but symbolic step," Ben Bland, director of the Southeast Asia Project at Australian think tank Lowy Institute, said last week before Congress passed the two bills. "It's really important for the Hong Kong democracy movement. Many people on the streets have been calling for the U.S. to signal its support and to signal its dissatisfaction with what the Chinese government has been doing in Hong Kong over the last few years: Squeezing the city's freedom and autonomy," he told CNBC's "Squawk Box Asia."

Losing special status

As a special administrative region of China, Hong Kong is governed under the "one country, two systems" principle. Under that structure, Hong Kong is given self-governing power, a largely separate legal and economic framework from China, and various freedoms including limited election rights. Such a system underpins Hong Kong's status as a global financial and business center, especially as a middleman between China and the world. The city's autonomy from China is also a reason why the U.S. treats it differently from other Chinese cities. For example, elevated U.S. tariffs imposed on China in the trade war don't apply to Hong Kong.

Hong Kong's importance to the Chinese economy is disproportionate to its size. Tianlei Huang Peterson Institute for International Economics

Losing that special treatment would damage the city's economy, and its repercussions could potentially feed through the global financial system. To be sure, the Hong Kong Human Rights and Democracy Act of 2019 by itself doesn't mandate the removal of the territory's special status if the U.S. finds that Hong Kong is not sufficiently autonomous from China. The revocation has to come from Trump through an executive order, or Congress via the United States-Hong Kong Policy Act of 1992, which spells out Washington's special treatment of the city. Nevertheless, analysts said Washington is not likely to go so far as to revoke the city's special status, given the economic stake the U.S. has in Hong Kong.

US interests in Hong Kong

One reason why Washington wouldn't cancel Hong Kong's special status is the tight trade and financial relationship between the two, observers said. On its website, the State Department said that more than 1,300 American firms operate in Hong Kong, of which 300 base their Asian regional operations there. Nearly all major U.S. financial firms have a presence there.

On trade, Hong Kong has been a major destination for U.S. legal and accounting services, according to the State Department. Last year, the U.S.'s largest goods trade surplus worldwide — at $31.1 billion — was with Hong Kong, the State Department said. Many of those relationships were built on Hong Kong's trusted position as a relatively safe place to access China — the world's second-largest economy with much untapped business opportunities. The American Chamber of Commerce in Hong Kong has said that anything that changes the status of the city would have "a chilling effect" on U.S. trade and investment in the city, reported Reuters.

Hong Kong's importance to China

Hong Kong's economic growth contribution to China has diminished through the years, but the city has remained an important financial center for mainland businesses. Given its openness to foreign investors, Hong Kong has for years been the place where mainland Chinese companies raise funds through listing on the Hong Kong stock market and issuing bonds.

Hong Kong's role as the China's financial arm for the rest of the world has helped mainland China in keeping its financial sector insulated ... French investment bank Natixis

In recent years, Hong Kong has become the gateway for foreign investors to buy Chinese financial assets through the stock and bond connect programs. The city is also one of the few places where the Chinese yuan is traded outside the mainland, facilitating the internationalization of the currency. "Hong Kong's role as the China's financial arm for the rest of the world has helped mainland China in keeping its financial sector insulated without suffering the negative consequences of such isolation, i.e. limited access to finance or difficult access to assets in the rest of the world," French investment bank Natixis wrote in an August report.