U.S. warning about Hong Kong signals Washington could do ‘a lot more,’ lawyer says

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The U.S. has issued a warning to U.S. companies operating in Hong Kong — signaling that Washington could take further action, says a lawyer who specializes in international trade compliance.

Adam Smith, a partner at law firm Gibson, Dunn & Crutcher, said Friday’s financial and regulatory risks advisory was “quite substantial” but it “doesn’t actually do anything with respect to changing the rules” right now.

However, it does indicate “there’s a lot more the U.S. could do” from a policy perspective, he told CNBC’s “Capital Connection” on Monday.

The nine-page advisory on Friday warned that U.S. firms are encountering several risks posed by China’s national security law in Hong Kong. Washington also announced sanctions on seven Chinese officials for violating Hong Kong’s autonomy.

Possible next steps

In response to Beijing’s crackdown on the former British colony, Smith said, what would “really change the nature of engagement and risk for parties in Hong Kong” would be sanctions on organizations, entities and institutions, which have been absent so far.

Sanctions on individuals can be a challenge to U.S. firms in Hong Kong, but the “real difficulty” would come from restrictions on organizations that businesses need to interact with frequently, he said.

People wearing face masks crossing a street at Hong Kong’s Wan Chai district on Feb. 16, 2021.

Zhang Wei | China News Service | Getty Images

China called Washington’s pressure and sanctions “nothing but a piece of waste paper.”

The U.S. wants to “undermine Hong Kong’s prosperity and stability, endanger China’s national security, and contain China’s development,” a spokesperson for the Office of the Commissioner of the Ministry of Foreign Affairs of China in Hong Kong said.

“The U.S. plot is despicable and contemptible, and it will never succeed,” the statement added.

Hong Kong’s attraction

For now, however, there remains “too much opportunity” in Hong Kong for businesses to move out of the city, Smith said.

“Hong Kong … still has an unbelievable amount of human capital that many companies still need,” he said.

Kurt Tong, a former consul general representing the U.S., and chief of mission in Hong Kong and Macao, said Hong Kong is still a good place for businesses to be despite the risks.

“There’s legal risk, there’s reputational risk, there’s a certain amount of operation risk — but I think that those risks are measured,” he said.

“At the same time, (businesses) need to keep their eye on the big picture, which is that China is an enormous and attractive economy to do business with. And Hong Kong is in many ways, still … one of the best platforms to do that work,” he added.

The rhetoric has been so tough from both sides, so there’s a lot of face-saving that needs to be done.

Kurt Tong

partner, The Asia Group

Tong, a partner at advisory firm The Asia Group, said the rule of law in Hong Kong has deteriorated, but most businesses are not convinced that it has been completely wiped out.

“I think it will take more to drive companies out of Hong Kong than the changes that have taken place thus far,” he told CNBC’s “Squawk Box Asia.”

Biden-Xi meeting?

As for the path forward, Tong said he expects U.S. President Joe Biden and Chinese President Xi Jinping to meet in the fall, and discuss each of their “red lines” that cannot be crossed.

In the meantime, he said, “diplomatic jousting” will continue.

“The rhetoric has been so tough from both sides, so there’s a lot of face-saving that needs to be done,” he added.

Trade discussions between the two sides have stalled for now, and the U.S. doesn’t have incentives to enter negotiations because it doesn’t believe such talks will be successful, Tong said.

“It’s a complex picture … the U.S.-China relationship under the Biden-Xi era,” Tong said. “We’re still on the … first scene of the first act of how this is going to play out over the coming year.”

Indeed. After Tong and Smith spoke, a new alliance of NATO member states, the European Union, Australia, New Zealand and Japan blamed China‘s Ministry of State Security for a massive cyberattack on Microsoft Exchange email servers earlier this year.

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