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China approves Hong Kong national security law

China has approved a plan to rein in Hong Kong protests, indicating that they threaten national security in the city. Rodger Baker, VP of Strategic Analysis at Stratfor, a RANE company, joins Yahoo Finance’s Akiko Fujita to discuss.

Video Transcript

AKIKO FUJITA: Now let's turn to geopolitics here-- some big developments overnight. China's legislature approving a resolution to impose its national security legis-- a law on Hong Kong. That paves the way for Beijing to essentially implement legal and enforcement measures in the same way it does on the mainland. Certainly likely to increase additional crackdown measures as well. This now raises questions about whether Hong Kong will continue to have that special trading status.

I want to bring in Rodger Baker. He is a VP of Strategic Analysis for Stratfor, a RANE company. And Rodger, this is something that I know you have been watching for some time. China has made it pretty clear what their ambitions are in Hong Kong, and yet I can't help but look at the last week and think how quickly this all moved forward. What are the implications in the near term?

RODGER BAKER: Well, I think in the near term, the implications are going to play out on the ground in Hong Kong. So this is-- well, we've already seen it started to re-trigger the protest movements inside Hong Kong, between this and the national anthem law that the Hong Kong government is looking into. So those protests are kicking back up all around the time that we're going to start seeing the lifting of social movement restrictions in Hong Kong, so that'll provide more opportunity for this type of activity to take place.

I think also nearby you're seeing responses from other countries who are growing more concerned about Chinese behavior than they were, say, a year ago, where they're looking at the Chinese actions in Hong Kong, they're looking at the Chinese actions in the South China Sea, they're looking at the Chinese so-called Wolf Warrior diplomacy around the world, the heavy handed use of economic tools to stop political commentary, and they're starting to shift their vision of China as well.

AKIKO FUJITA: Rodger, you talk about the protests on the ground. I mean, they were bound to flare up going into June and July as well. Some key anniversaries on that front. Now that this resolution has passed what does that mean in terms of Beijing's ability to crack down on the dissent there?

RODGER BAKER: Well, some of it is still going to be how fast then that this can turn into actual legislation inside Hong Kong so that they can be able to implement it. If they rush that through, that'll be ready to be able to go into place. But clearly, it empowers the Hong Kong security forces under the direction of Beijing to increase the arrests, the detentions, the shutting down of protests and demonstrations.

AKIKO FUJITA: We heard Secretary of State Mike Pompeo yesterday essentially say that Hong Kong no longer operates autonomously from China. We've heard a number of retaliation measures or potential measures coming from Washington. You know, at this point, what can the US do? How do you think Washington is going to respond to this?

RODGER BAKER: Well, the challenge is that the amount of options for the United States is extremely large. This goes up ultimately to the president to make his decision what he wants to do in regards to the decertification by the secretary of state. It can be anything from a sternly worded statement through some very targeted economic actions at key individuals all the way to potentially removing the special trading privilege for Hong Kong and putting Hong Kong under the same tariff regime as mainland China.

We don't necessarily see the United States going that far, that fast, but certainly there is an increasing call even from the US Congress to start taking other targets against China. Congress is working on a bill to target Chinese banks that have anything to do with the erosion of autonomy of Hong Kong.

The US administration has looked at things like pulling out US national pension funds for being able to invest in Chinese companies. We've recently had some efforts that may lead to some delisting of Chinese companies on the US stock exchange. So there's a lot of aspects where we're seeing this move beyond just the political and just the economic into some of that fiscal and financial space.

AKIKO FUJITA: Are any of those measures that you mentioned-- beyond completely stripping Hong Kong of that special trading status, is that likely to invoke any kind of response from Beijing?

RODGER BAKER: I think whatever the United States does, it's going to evoke a response from Beijing. Beijing has been very vocal and active over the last several months. They feel a sense of embattlement at the moment with this double world pressure from the US trade pressure, political pressure, and some of this rising backlash against the questions around the origins of COVID or China's potential withholding of information about the spread. So China's feeling fairly embattled. They're going to be acting in response fairly rapidly.

Now the Chinese don't necessarily always do this through very easy-to-see open tools. Sometimes it's very selective enforcement of their own laws on certain American companies that they hope will push greater pressure on the United States. They may also decide now to invoke the Act of God clause in the first phase of the trade deal and say they're simply not going to buy US agricultural goods.

AKIKO FUJITA: What does this all mean for American companies that are operating there? I mean, for years American companies have set up shop in Hong Kong because they've seen that as a bridge to the mainland without operating under the legal implications of being a mainland business. So, you know, we're not there yet in terms of stripping that set special trading status. But what kind of reaction do you think-- you know, what are American businesses considering right now?

RODGER BAKER: Well, there's a lot of them that are really reweighing their position in Hong Kong. Even if you start to continue to erode Hong Kong's special status, there's a concentration of financial and economic activity that takes place in Hong Kong that's mutually beneficial. So I don't think that we're going to see a sudden flood of major operations just leaving Hong Kong and running away. But I think that there are questions that are being asked.

If Hong Kong's special status is eroding and the Chinese special economic zones are increasing the opportunities in those spaces, is it really cost effective ultimately in the long term to stay in Hong Kong or to increase operations in Hong Kong? Or do you start to diversify and move away from Hong Kong as your central point? And that's some of the questions.

And I think the secondary aspect is going to be whether the expatriate community, which has long loved Hong Kong as a place to be and operate, whether they start to say, you know what, this just isn't quite what we want, and it becomes harder for some of these companies to keep staff there, similar to what we have seen at times in Beijing.

AKIKO FUJITA: And Rodger, you know, finally, I think there's questions still about what the end game is for China in moving forward on this and also the timing of all of this. How much of this is all about Taiwan and sending a message on that front?

RODGER BAKER: I think a lot of this is about Taiwan. If you go back to the Taiwanese elections at the beginning of this year, we had the re-election of Tsai Ing-Wen. That really did solidify, if you saw the action to the KMT afterwards, it solidified Hong Kong as only having two political spectrums now, pro status quo or pro independence. That means that the opportunity for peaceful unification with the mainland is pretty much gone, if it wasn't gone already.

The mainland knows this. The idea of keeping Hong Kong is that example for Taiwan to try to follow I think loses some of its efficacy. And as we're looking-- you know, next year is the hundredth anniversary of the Chinese Communist Party. The Chinese are really looking at solidifying and securing what they consider to be national unity. You've seen the expansion out into the South China Sea activities that have been going on. They're going to be putting a lot of pressure on Taiwan coming out of this action.

AKIKO FUJITA: OK. Rodger Baker, always good to talk to you on these issues. He is the VP of Strategic Analysis at Stratfor, a RANE company.