Hong Kong Says It Calls the Shots, Not Beijing. Investors Are Wary.

Isolated from the world and pulled closer into Beijing’s orbit over the past three years, Hong Kong is finding that its fortunes are tied more than ever to China.

The city’s stock market, which is seen as a proxy for China’s economy, is among the world’s worst performing this year. The rivers of money that flowed into companies, minting new wealth, have slowed to a trickle.

And there is the gnawing feeling that the once-vibrant international city that staked its reputation on being separate from China has itself become more like the rest of China.

To counter this sentiment, officials are making a big push for investors overseas, with trips to Europe and the United States. Paul Chan, the city’s finance chief, is visiting Paris and London this week and will then travel to Berlin and Frankfurt before moving on to the United States.

Mr. Chan, however, is in a tight spot.

Hong Kong, a former British colony, has owed much of its success as a global financial capital to its semiautonomous status under “one country, two systems,” promised during the British handover of Hong Kong to China in 1997. The political accommodation ensured that Hong Kong could exercise a high degree of autonomy over its governance and laws, allowing it to protect rights and freedoms not granted elsewhere in China.

A national security law enforced in 2020 by Beijing in Hong Kong after widespread protests has undermined this autonomy. Under the broad and vaguely worded legislation, any politician who is not a patriot to Beijing has been purged or punished by the government. Officials have pledged loyalty to “the motherland”; free speech has been rolled back and dissent crushed.

Speaking to concerns that Hong Kong was losing its identity, Mr. Chan told politicians and business leaders in Paris: “Hong Kong’s singular ‘one country, two systems’ is alive and well.”

But Hong Kong’s political changes have escalated tensions and hardened geopolitical lines between China and the West, affecting how Western businesses operate in Hong Kong, including some that have pulled up and left.

“It is pretty clear that Paul Chan and his ilk are trying to toe the line,” said Andrew Collier, managing director of the Hong Kong-based research firm Orient Capital. “If you viewed Hong Kong as a safe harbor from the politics of the mainland, then that view has changed.”

As the many foreign businesses that remained in Hong Kong have tried to adjust to the new political environment, they have been given reasons for fresh concerns.

In July, the city’s chief executive, John Lee, offered financial rewards for any information leading to the arrest of eight pro-democracy activists who fled Hong Kong’s national security law to places like the United States and Britain. In his appeal, he said they should be treated like “rats in the street,” and added that the police would “vigorously pursue” anyone who posed a threat to national security in the city. This week, Beijing ordered consulates in Hong Kong to turn over personal information about all local staff, including addresses and passport and identification numbers, bringing the city closer in line with rules elsewhere in China.

Against the backdrop of shifting regulations, law firms in Hong Kong are struggling to counter a perception among clients that the legal landscape has deteriorated, said Lester Ross, a corporate lawyer in the Beijing office of WilmerHale who works with lawyers in Hong Kong.

“There has been a loss of confidence in Hong Kong’s legal system,” Mr. Ross said. “Real or imagined, that sentiment is very real.”

The erosion of rights has also inhibited the ability of investors, financial analysts and academics to speak freely. Companies are choosing other jurisdictions, like London and Singapore, for international arbitration out of concern that Hong Kong is no longer neutral. Many clients have also raised concerns with their lawyers about the privacy of their communications in Hong Kong.

“I understand these concerns,” said Lau Siu-Kai, a senior adviser to the Chinese government on Hong Kong policy. “But you have to bear in mind that this national security law is still a new law, and both China and Hong Kong are learning how to implement this law effectively.”

At a luncheon last week, Mr. Chan addressed worries about whether foreign business could still trust Hong Kong law. He assured a group of foreign businesspeople and diplomats that the city’s common law system, a cornerstone of confidence among investors and businesses, was intact and that Xi Jinping, China’s top leader, had promised to respect Hong Kong’s system of governance.

Beijing’s promises, however, are not helping to alleviate worries about the city’s independence.

The concerns have been simmering for several years. But they are being brought front and center as China’s economic downturn, its worst in decades, spills over into Hong Kong. Like the rest of China, Hong Kong is struggling to rev up its economy after closely following Beijing’s “zero-Covid” pandemic policy, which left it cut off from the world for much of the past three years.

This spring, the city finally swung out of its third recession in four years. But in recent months, growth has slowed, and economists are revising their expectations again.

Chinese tourists, who once made up the bulk of visitors to the city and far outspent other visitors, are returning, but they aren’t spending the way they used to. Officials gave away half a million tickets for flights to the city through a “Hello Hong Kong” campaign, but tourists from abroad have been slow to come back. Hong Kong’s international airport, the busiest in Asia before the pandemic, has ceded that title to regional competitors in Seoul and Bangkok.

Hong Kong’s stock market is being pummeled by investors who are skittish about the Chinese economy. So far this year, Hong Kong’s stock market has fallen more than 11 percent, making it the fourth-worst performing market in the world. This gloom has dented the appetite of Hong Kongers to spend.

Some Western investors are staying away right now, amid broader geopolitical tensions that have prompted American officials to ban investment in certain Chinese companies.

“If the U.S. -China relationship was not that bad, the stock market would perform better,” said Simon Lee Siu-po, a senior lecturer at Chinese University of Hong Kong. “If the economy of China was better, the stock market would perform better, too,” he said.

The prospects also don’t look great for companies listing their shares publicly in Hong Kong. Companies this year have raised just $2.7 billion, the lowest amount in two decades, according to the most recent data. More stringent rules for Chinese companies looking to list outside mainland China, as well as Mr. Xi’s tightening grip on private businesses in China, have dampened optimism.

The list of conglomerates going bust in China is growing, prompting more questions about corporate governance standards in Hong Kong, where most of them are publicly listed.

HNA Group, a Chinese conglomerate that was once China’s biggest dealmaker, went bankrupt in 2021 and then disclosed that nearly $10 billion of its money had been embezzled. Last year, auditors for more than a dozen Chinese property companies listed in Hong Kong resigned, according to Reuters, drawing attention to the industry and corporate governance issues.

The financial uncertainty and political changes are making Hong Kong seem, to some investors, like any other Chinese city.

But the Chinese government believes that it can seize greater political control of Hong Kong while keeping it distinct as a financial hub.

“China wants Hong Kong to use ‘one country, two systems’ to play a role no other Chinese city can play,” said Mr. Lau, the senior adviser to Beijing. “If you compare Hong Kong to other Chinese cities, why are so many companies still trying to raise capital in Hong Kong? They see Hong Kong as a different place to Shanghai or Beijing.”