COVID, the pro-democracy crackdown and China's trade war with the United States have dealt a severe blow to Hong Kong's reputation as an international financial hub. Once seen as the main gateway between the West and China, many investors now believe it is increasingly hard to separate Hong Kong from the authoritarian mainland — a dilemma that has sparked an exodus of foreign firms from the city known as the Pearl of Asia.

Since 2019, the number of global companies with regional headquarters in Hong Kong has fallen by 8.4%, according to data from the city's census and statistics department.

The figures are even more stark among US firms, a third of whom have shifted out of Hong Kong over the past decade, the Wall Street Journal reported recently. Those multinationals that remain have cut headcount in the semi-autonomous city by nearly a third over the past four years.

New Chinese security law could fuel exodus

After having a national security law imposed by Chinese President Xi Jinping in 2020, Hong Kong's legislators have just passed further legislation that rights groups say will all but wipe out dissent. The first put paid to the yearlong democracy protests, saw hundreds of activists arrested and shuttered independent media outlets. The second makes it even easier to target individuals, companies and civil society groups deemed to be anti-government and anti-Beijing. Many foreign investors are just as worried.

The US Consul General to Hong Kong Gregory May recently warned in an interview with Bloomberg that some US firms are now using burner phones and laptops when visiting the city because of data security concerns and what he said was a gradual move toward the kind of internet censorship seen on the mainland.

The US State Department recently warned that the new security law will adopt "broad and vague" definitions of state secrets and external interference that could be used to silence critics.

Economic freedom hurt by rights clampdown

"If you're trying to restrict freedom of association, assembly and expression, you're going to have a spillover effect on rule of law and economic freedom," Matt Mitchell, a senior fellow at the Center for Economic Freedom at Canada's Frazer Institute, told DW.

Last year, Frazer and the US-based Cato Institute ranked Hong Kong just 46th out of 165 jurisdictions on the annual Human Freedom Index. The drop of 17 places was the largest of all territories studied, other than military-run Myanmar.

"Falling to 46 masks a lot of things because it includes data from 2021 when every country was restricting some freedoms as a result of COVID," Mitchell warned. "It's quite possible that Hong Kong's ranking will slide further" [in the 2024 index, set for publication in September.]

Hong Kong also fell to second place in the Economic Freedom Index, having ranked top ever since the ranking was created — this time losing out to Singapore. The tropical city-state has always billed itself as the "Switzerland of Asia." Some 4,200 multinationals now have their regional headquarters there, according to Bloomberg Intelligence, versus 1,336 for Hong Kong.

The decision to move out of Hong Kong is often fueled by a need for firms to distance themselves from China amid the ongoing geopolitical tensions with the US over the future of Taiwan, the Ukraine war and trade. Those strains have been elevated recently by Washington's move to prevent Chinese firms from sourcing high-end chips used to power artificial intelligence (AI) platforms.

Singapore benefits from US 'friendshoring'

Singapore and other Asian hubs have, meanwhile, benefited from the recent US policy of friendshoring — where US supply chains are increasingly prioritized around countries regarded as allies, according to Stephen Roach, Morgan Stanley's former Asia chairman.

In a recent op-ed in the Financial Times, Roach wrote that Washington's policy shift has "put pressure on Hong Kong’s Asian allies to pick sides between the US and China." 

Entitled: "It pains me to say Hong Kong is over," Roach's op-ed sparked widespread consternation in both Hong Kong and China, as he singled out the current lackluster performance of the Hong Kong stock market.

The HSI index currently trades at 16,543, about 50% lower than its alltime high in 2018 and around the same level as in 1997, when the territory was handed back to China by colonial ruler Britain. By contrast, many US stocks have rallied sharply to new highs in recent months.

Hong Kong financial sector still strong, apart from stocks

"If you look at the five pillars of Hong Kong as a financial center; besides the stock market, the other four pillars — bond market, insurance sector, asset management and banking sector — have been improving," Heiwai Tang, Director of the Asia Global Institute at the University of Hong Kong, told DW.

Tang cited his own research showing that Hong Kong is seeing net inflows of younger, better-educated workers and said the city's legal system, which is separate from China's, continues to be "very independent, transparent and fair."

Hong Kong carves out new role

He predicted that Hong Kong would continue to be a gateway to China but more for other Asian countries and the Middle East.

"It's premature to say that Hong Kong is over and that the city is no longer vibrant, important for China and the rest of the world," he insisted.

Others see Hong Kong playing a more critical role for Chinese firms operating internationally as Beijing opts for its own version of friendshoring as tensions with the West remain elevated.

"Hong Kong is morphing from an international financial center to an offshore hub for Chinese businesses," Mark Williams, chief Asia economist for the London-based Capital Economics, told DW.

"It used to compete with other global financial centers for Chinese business. But Chinese firms are wary of listing in London or New York, and Hong Kong is the only global financial center that can offer these firms security from geopolitical strains."

Edited by: Uwe Hessler