Hong Kong’s National Security Law came into effect on July 1, 2020 criminalizing secession, subversion, terrorism, and collusion with external forces in what critics describe as an unprecedented crackdown on pro-democratic voices in the Special Administrative Region (SAR).

The new law also introduces the very real fear that it could ultimately empower Chinese authorities to access and alter user data and information from any company operating in Hong Kong. This is forcing foreign tech companies to consider whether or not to keep operating and storing sensitive data in the city, not so long ago considered the West-meets-East hub of modern trade and commerce in the region.

China’s new National Security Law gives Hong Kong authorities the power to demand firms remove posts, block certain users, and provide identification records or assistance with decryption should there be a “reasonable” ground to think that national security has been compromised.

Non-compliance comes with a hefty price tag: 10,000 HKD (C$17,300) in fines or jail terms of six to twelve months. What actually constitutes a threat to national security in the context of this new law remains unclear. Equally concerning is its applicability to anyone transiting through Hong Kong, even if the proscribed offence was committed outside of the SAR.

In the four weeks since the National Security Law has come into effect, foreign corporations still face more questions than answers, but it is clear that the Law has prompted a serious ‘rethink’ about operating in Hong Kong. Some tech firms, like South Korea’s Naver, known as the ‘South Korean Google,’ are already pulling the plug.

The tech ‘exodus’ begins

Earlier this month, Naver moved its back-up data storage from Hong Kong to Singapore. Naver dominates web services in South Korea, and it is one of the key players in the innovation sector. The tech giant is also the majority stakeholder of Line, a messaging app popular in Japan, South Korea, and various countries in Southeast Asia. Naver had stored its encrypted back-up data in Hong Kong since October 2016.

The National Security Law has raised concerns in South Korea over the possibility of Chinese authorities accessing sensitive data of Naver users. Naver was quick to point out that its back-up data has always been secured through encryption, but did confirm this month that its server in Hong Kong has completely ‘re-set’ and that it has transferred its back-up data to another server in Singapore.

Other tech firms are expected to follow Naver’s lead. Facebook, Twitter, Google, and others are currently reviewing their operations in Hong Kong for the same reasons, and have announced that – for the moment – they have stopped processing any requests from Hong Kong’s law enforcement authorities to hand over user data.

Meanwhile, many virtual private network (VPN) companies, which have been providing ways of bypassing internet censorship to users in China, are reassessing their operations in Hong Kong, taking steps ranging from actively monitoring the situation to pulling out of Hong Kong entirely, as Toronto, Ontario-headquartered VPN operator TunnelBear has done.

These developments in Hong Kong’s vibrant tech sector following the arrival of the new National Security Law underscore a widespread and growing distrust and fear of Beijing, and its growing ability to access personal data from users and countries around the world. They may also point to an expanding loss of appeal of the Chinese business and consumer markets in the context of the growing U.S.-China trade/tech war. And while the actual implementation of the new law may be less severe than expected, and trade wars tend (one hopes) to diminish over time, tech firms may well believe that concerns from their users alone justify foregoing the risk of doing business in the semi-autonomous city of Hong Kong.

Canada’s stake in the Hong Kong of tomorrow (and today)

Canadian companies have had a strong historical presence and connection to the Hong Kong economy. Future economic ties, however, – especially investment ties – may well be reconsidered in light of the new law.

According to the Asia Pacific Foundation of Canada’s Investment Monitor, a direct investment deal tracker, Canadian firms invested C$11.5 billion in Hong Kong between 2003 and 2020, making it the fourth most popular destination for Canadian investment in the Asia Pacific. In the software and computer services sector, Canadian firms invested C$282 million in Hong Kong over that same time period. Some notable Canadian tech firms that have made investments in the city include Waterloo-based software and service provider Blackberry and Toronto-based consumer intelligence platform Vision Critical. Because of the nature of direct investment – usually indicating a long-term physical presence in an economy – the size of Canada’s investment in the territory leaves it exposed to significant risk under the new law.

Most companies leaving Hong Kong are relocating their operations and assets to Singapore, as Naver has done. English-speaking and equipped with a robust business and tech ecosystem, Singapore is a natural alternative to Hong Kong. Currently. Singapore ranks tenth as a destination for Canadian direct investment, accounting for C$5.3 billion in Canadian ‘deal flow’ since 2003. Canada’s goods exports to Singapore (C$1.4B) are also less than Canada’s goods exports to Hong Kong (C$4B).

Beyond the strict scope of ‘tech’ sector in Hong Kong, other companies that process data operating or looking to operate in Hong Kong are considering alternate financial hubs in the Asia Pacific, such as Seoul and Tokyo. Many jurisdictions across Asia are picking up on the ‘opportunity’ to attract firms formerly operating in Hong Kong. For example, in light of the new security law, Japan is considering offering incentives such as visa waivers, tax advice, and free office space to financial sector workers from Hong Kong.

In the coming weeks and months, we will continue to see the reaction of foreign companies operating in Hong Kong – from compliance to closing up shop. The near future will bring about a significant shift in foreign companies' business ties with Hong Kong, raising critical questions: will Singapore become the new Hong Kong? How should Canadian stakeholders respond in the medium and long term? One thing is clear – China’s new National Security Law  is forcing the Canadian private sector to re-assess their investments and operations in Hong Kong. Timely data collection and analysis of the developments in Hong Kong will be critical for the decision-making process of these companies.