Chinese law threatens U.S. firms doing business in Hong Kong, federal agencies warn

Four federal agencies warned U.S. companies on Friday that operating in Hong Kong puts their employees and business at the mercy of an increasingly authoritarian Chinese government.

National security law in focus: International firms have long relied on Hong Kong’s market-based legal system separate from mainland China. But the new business advisory warns that the Chinese government’s national security law for Hong Kong, imposed a year ago, has “led to major structural changes that significantly reduced Hong Kong’s autonomy.”

“Hong Kong’s business environment has deteriorated in the past year,” Secretary of State Antony Blinken said in a statement accompanying the advisory. “The many legal, financial, operational, and reputational risks long present in mainland China are now increasingly prevalent in Hong Kong.”

Four risks: The risks fall into four categories, the Departments of State, Treasury, Commerce and Homeland Security warned in the advisory. They include business risks from the law, like the risk of arrest or sanction by Chinese authorities, data privacy and surveillance risks from government, transparency issues and access to business information, and potential contact with individuals and entities sanctioned by the U.S. government.

Huge market: The potential impacts are huge. U.S. direct investment in Hong Kong totaled $82 billion in 2019, approaching the amount invested in all of mainland China, which came in at $116 billion that year.

Broad warning: The warning is the Biden administration’s latest caution for businesses operating in China. It comes just days after the four agencies, joined by the Office of the U.S. Trade Representative and the Labor Department, issued a similar advisory warning that American firms operating in the China's northwestern Xinjiang region may be in violation of U.S. human rights and forced labor laws.

What’s next: Unlike the Xinjiang document, the Hong Kong warning does not explicitly advise U.S. companies to cut ties with the market. But it does warn that U.S. companies may face “heightened risk and uncertainty” in sanctions compliance, like having to choose between following U.S. sanctions and complying with Chinese law in Hong Kong. If they choose the latter, companies can be exposed to “civil and criminal penalties under U.S. law.”