US Sanctions on China over Hong Kong, Xinjiang Will Push Beijing Further Away from Washington

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Lack of historical understanding and depth of local issues underline current US policy. 

Op/Ed by Chris Devonshire-Ellis 

The US is drawing the ire of Beijing this past week by enabling legislation that would push the US President, Donald Trump, into imposing sanctions on specific Chinese leaders, and upon trade with Hong Kong should certain conditions not be met to the US satisfaction. These include monitoring the situation in Xinjiang, where thousands of mainly local Uighur (Muslim) citizens have been detained in correctional camps, and to Hong Kong, where the US Government has stated it will review the close trade and preferential relations the United States has with Hong Kong should it perceive that Human Rights have been broken in the territory. The latter is a reaction to pro-democracy riots taking place in Hong Kong the past few weeks and allegations of Police brutality.

Although Trump can refuse to sign off any requests to impose sanctions, the fact these measures have now passed into law has upset Beijing, which calls it an infringement upon their sovereignty. The steps are also likely to interfere with any hopes of a breakthrough in the long running trade war between Beijing and Washington.

There are issues here. As concerns Hong Kong, the primary reason for the unrest has generally been caused by a lack of leadership and dubious local policy-making by the local Hong Kong Government, often in collusion with local business tycoons. This has lead to local HongKongese being slowly forced out of their home in preference to wealthier mainland Chinese, who buy up duty free products, have forced up property prices, taken up educational places and effectively introduced a mainland Chinese culture into the territory at the expense of the traditional Hong Kongese culture. That extends to the removal of iconic Hong Kong landmarks, language, and social behavior. We have written about these issues in the articles The Current Business Environment On The Ground In Hong Kong and Despite Social Issues, Hong Kong Is Still Holding Up As A Vibrant Business Hub

In fact, Beijing has been remarkably restrained as concerns the problems – the PLA and Chinese Military have not been deployed in the territory and have not been involved except for an unofficial incident when soldiers dressed in singlets and shorts helped clear up debris. Beijing is effectively saying that it is a Hong Kong Government problem to sort out and thus far has resisted in getting involved bar making comments. That is a rather greater show of restraint on home territory than the US typically shows.

Dezan Shira & Associates have had an office and been incorporated in Hong Kong since 1992, and we have experienced many issues. In fact, our Hong Kong revenues, largely obtained from foreign investors setting up in the territory and our servicing them (we have several hundred foreign invested Hong Kong limited liability companies under our professional services management) has seen an increase in revenues this year. Alibaba meanwhile have just issued this years largest IPO in Hong Kong and raised US$11 billion. The Hong Kong financial services sector is certainly not broken and the city remains a viable business hub for foreign investors intending to use it as a gateway to China.

There are reasons for this. Hong Kong has and continues to have numerous and original advantages as concerns trade, legal, and tax links as follows:

  • The Hong Kong dollar is an internationally traded currency and is linked to the US dollar. It is easy and simple to transfer Hong Kong dollars anywhere in the world and for it to be converted to local currencies elsewhere, with the protection of the US dollar peg preventing it from experiencing fluctuations. It remains a globally “safe” currency to use.
  • Hong Kong does not impose any additional taxes on profits realized externally from its territory. This means dividends, for example, paid from the profits of a China-based company can be sent to Hong Kong without incurring any further taxes, and be distributed from there.
  • Hong Kong companies are subject to Hong Kong’s Rule of Law, which remains based on the British, not Chinese legal system.
  • Hong Kong enjoys preferential trade with China under the “Closer Economic Partnership” system or CEPA, which provides early bird market entry and other advantages to qualifying Hong Kong companies in new and emerging trade areas. This capability is not available to companies from other regions or countries.
  • Hong Kong company documentation is in tri-lingual format – English, Simplex (Hong Kong) characters, and Mandarin characters. This saves a lot of time and money on having translations done.
  • Hong Kong is a free port and imposes zero or low import taxes on thousands of products, which can land in Hong Kong duty free.
  • It has extensive connectivity via road, rail, shipping, and air to all major Chinese cities and throughout Asia.
  • It is the center of the “Greater Bay Area,” which includes all cities of the Pearl River Delta and collectively represents 26 percent of all mainland China trade. Hong Kong is right in the heart of this.
  • Taxes remain low, with individual income tax at a high rate of 15 percent and corporate income tax at 16.5 percent.
  • Hong Kong is currently ranked fourth in the World Bank Global Ease of Doing Business rankings, and its ranking score has in fact increased slightly over the past year.
  • US banks, such as Citibank are fully licensed in Hong Kong, while other US banks, such as Bank of America, Bank of New York Mellon, Cathay Bank, East West Bank, JP Morgan Chase, HSBC US, State Street & Trust Bank, and Wells Fargo all have Hong Kong licenses. US banks with restricted banking licenses operating in Hong Kong include Bank of America Securities, Fiduciary Trust and Silicon Valley Bank. What does this mean? That American money and assets held in Hong Kong are safe.

The US imposing sanctions on Hong Kong via targeting mainland Chinese officials rather misses the point. Beijing has been hands-off. It would be more productive for Hong Kong tycoons and the local government officials to work out how to better improve the territory and be educated over the divestment of vested interests for the common good. There are American think-tanks and academics that can assist instead of missing the point and resorting to sanctions with the mainland.

In terms of the Uighur issue, this is far more complicated, and to many, passionate as also it invokes the word of God. To some, it pits believers against atheists. The Uighurs are Muslims, and have long inhabited Xinjiang Province in addition to having significant populations in other Chinese Provinces such as Ningxia. The main issue here is one of traditional culture, mixed with language and religion and this sits at odds with China’s atheist, 21st century approach to civilization. Leaving the religion aside – I have many good Muslim friends (one even wished me “Happy Christmas” on Monday) the Uighurs do have a somewhat backwards mentality to their culture. Marriage to non-Uighurs is largely forbidden, the practice of Purdah – female seclusion and the wearing of the Nijab – is still carried out, and Uighurs by and large refuse to learn Mandarin. Foreigners and non-Muslims, unlike in many other Muslim countries, are made to feel unwelcome and are denied access to Mosques. That is not to say there are not contented Uighurs enjoying a more liberated lifestyle. But many refuse, and with a diminishing ethnic, inter-marrying population, are gradually becoming more insular. I know this because I have traveled the region extensively over the past two decades. I wrote the Business Guide To West China awhile back; it went into three editions and to date is the only book on the subject. The reality is that a section of the Uighur community does remain disenfranchised and left out. They turn to religion for answers, and seek the return of what they call their ancestral homes as if it will solve their problems. But the fact remains that the disenfranchising of the Uighurs has not solely been a result of policies enacted by Beijing – it is a self imposed, almost tribal exclusiveness that certain sections of Uighur culture seek to use to maintain their traditions – even to the extent of barring marriages to other Muslims. It is self defeating.

The vast majority of the members of the US House of Representatives that endorsed the Uighur Act of 2019 will never have been to Xinjiang and will not have studied the region. Should one do so, they will find that until the Founding of the Communist Party of China, Xinjiang (and parts of Tibet) were wild, lawless and dangerous regions. Accounts by esteemed explorers and adventurers such as Joseph RockRoy Chapman Andrews, Nikolai Prezwalski, and Francis Younghusband tell of banditry and murder. As for the so-called East Turkestan Republic, (whose flags are now appropriated by several Western media outlets and described as “The Uighur Flag”), it actually existed for just three months and was run by an especially violent warlord, Isa Alptekin, who considered murdering entire families, including children, as part of his remit. It lasted three months before the Chinese Army regained control.

Since 1949, the entire region has been at relative peace – admittedly under a significant Chinese military and police presence. But at the same time, when Xinjiang borders Afghanistan, Pakistan and some other fairly difficult regions, maintaining the peace while resisting frequent attempts by IS insurgents to infiltrate the Uighur community over the years have left Beijing with little choice but to ramp up surveillance and security. If not, bombs would be exploding and civilians would die. Were it not for the Chinese presence, violence would explode in Xinjiang among regional and factional Islamic fighting – it would be a bloodbath. What does Beijing receive in return for preventing this? Sanctions.

I wrote about this issue in fact a decade ago, in the article Uighurs Should Develop Tolerance In Chinese Lands (the comments section is well worth a read). It seems to me that the United States has little tolerance for the Chinese in Xinjang as well. But would Washington really want to pick up the bill if fighting broke out?

Meanwhile, the sanctions will not have gone down well in Beijing. China will be feeling it is gradually being squeezed, just as Washington has behaved with Moscow. Policies from Beijing as concerns trade will be increasingly geared to minimizing the impact of future sanctions the United States will almost certainly at some point attempt to levy. That means expanding trade flows elsewhere, with the Belt & Road Initiative being just one part of that. With China a lead player in the BRICS grouping, who are about to be responsible for over 50% of global GDP in the next ten years, the United States needs to be very careful what it wishes for.

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