As the trade delegation from the European Parliament flew back home after a three-day visit to Hong Kong ending on December 7, it left a curious parting shot for the special administrative region’s leaders to ponder.
“We are concerned to hear about media self-censorship and about interpretations of the Basic Law prior to court rulings,” said Jo Leinen, chairman of the European Parliament’s delegation for relations with China.
The dyed-in-the-wool social democrat could have been referring to a host of unsavoury issues that have arisen in Hong Kong of late. One of the more persistently troubling is the influence of China’s National People’s Congress (NPC) Standing Committee, the country’s top legislative body, over Hong Kong’s judiciary.
The comment appears to reference an incident in October 2016 when Hong Kong’s government attempted to expel two newly elected pro-independence politicians from the Legislative Council after they altered the wording of the oath used for the swearing-in process to reflect their negative opinions of China.
Before the Hong Kong courts had time to reach a decision, the NPC Standing Committee invoked its right to “interpret” the local oath ordinance and stated that those who refuse to treat it “sincerely” face disqualification. The Hong Kong courts subsequently ruled that the politicians’ actions breached the law.
Clearly these issues matter for those born and bred in Hong Kong. It has been 20 years since it was handed back to China, and many harbour great anxiety about the city’s future if its Basic Law – Hong Kong’s de facto constitution – gets ripped up. Although this in theory couldn’t happen for another 30 years at least, many people believe it’s already under way.
Attacks on Hong Kong’s international reputation will undoubtedly unsettle senior figures in the city’s government. Keen to broadcast itself as the trading gateway between East and West, its most valuable asset is its access to China combined with a legal jurisdiction set to the rule of law. Sustained negative publicity could have severe economic implications.
The territory has gone to great lengths in the last year to promote itself as the perfect legal jurisdiction and centre for arbitration for China’s Belt and Road Initiative. The strategy is a sound one.
As investors in China-led infrastructure projects look for legal surety when dealing with Chinese counterparts in particular. Hong Kong’s proximity and wealth of legal expertise should provide that certainty needed.
“The skill set for Belt and Road in terms of project and export finance, infrastructure finance, structuring and indeed the legal system for dispute resolution, sits firmly here in Hong Kong,” Stuart Gulliver, group chief executive of HSBC Holdings said at the Asian Financial Forum in Hong Kong on January 15.
When asked whether investors in very long-dated projects should think twice before using Hong Kong, lawyers operating in the special administrative region who FinanceAsia spoke to all agreed there should be very little to fear. “Why would China attempt to destroy its jewel in the crown?” remarked Paul Starr, a partner at King & Wood Mallesons.
Although not tangibly legalistic, it is still a fair response. As China searches for foreign investment to support President Xi Jinping’s huge infrastructure initiative, it makes little sense to destabilise Asia’s most influential financial centre. If anything, China should ensure it does everything in its power to support it.
The indication so far is that it will. The office of Hong Kong Chief Executive Carrie Lam said in early December this year Beijing would soon set out a clear path for Hong Kong’s role in the Belt and Road strategy and that China’s National Development and Reform Commission, a very influential body charged with mapping out China’s economic path, has set a series of “tasks” for Hong Kong to work on.
But that doesn’t mean Hong Kong isn’t competing with China. In fact it most certainly is. While it is far from being able to claim it operates under the rule of law in the way most of us understand it, China has started to internationalise the standards to which investment and project contracts are written.
Take arbitration. In October 2017, the International Investment Arbitration Rules of the China International Economic and Trade Arbitration Commission (CIETAC) came into force. According to Herbert Smith Freehills, a law firm, this is the first set of investment arbitration rules ever promulgated by a Chinese arbitration institution.
Intended to support Chinese companies “going out” as part of the Belt and Road Initiative it also supports the resolution of investment disputes between investors and host countries. It is also there to protect Chinese investors who are anxious they will be subject to bias offshore in jurisdictions unfamiliar with Chinese law.
In a note to clients published on December 4, Herbert Smith Freehills wrote: “It is unlikely that states will renegotiate their bilateral investment treaties with China to include CIETAC investment arbitration as a dispute resolution mechanism. However, there is potential for parties to select CIETAC investment arbitration in contracts between investors and foreign states, governmental organisations or entities whose conduct is attributable to a state.”
Arbitration rules aside, China needs to show it can cooperate with third parties in a way that engenders fairness and openness well before a dispute occurs. While attention is rightly spent on its treatment of Hong Kong, it also needs to think very seriously how it responds to two significant setbacks for the Belt and Road Initiative – both the governments of Nepal and Pakistan waved goodbye to Chinese cooperation in strategic infrastructure deals: the Budhi Gandaki hydro electric project and Diamer-Bhasha dam project respectively.
“The inadequate consideration of the host country’s interest appeared to be the critical factor in annulling cooperation with Beijing in both cases,” noted a December 8 op-ed on the potential success or failure of Xi Jinping’s Belt and Road project from The Diplomat.
Hopefully this statement won’t be applied in the case of Hong Kong and China. Or ever again, for that matter.
