Investors don’t need to worry about Hong Kong—yet

June 4, 2020, 9:17 AM UTC

On May 21, during the opening of China’s annual meeting of Parliament, Beijing announced it would impose a national security law on Hong Kong—circumventing the special administrative region’s local legislature and arguably violating the “one country, two systems” principle that has safeguarded Hong Kong’s autonomy.

Beijing says that the law is designed to target only a “small group of people” who supposedly threaten China’s national security. Hong Kong officials have assured investors that the city’s vibrant business community will not be affected. However, there are concerns within the business community that Hong Kong’s rule of law—central to the city’s economy—has been irrevocably tainted.

Fortune’s Clay Chandler and Grady McGregor sat down with Cora Chan, deputy head of the law department at Hong Kong University, to discuss the impending legislation. While optimistic about the future and maintaining a belief that, in the short term, businesses won’t be affected, Chan cautioned there is now always a risk the wind could change.

The Q&A has been edited for length and clarity.

Fortune: Why did Beijing push this legislation through now, 23 years after Hong Kong’s return? Is there some pressing new perceived threat that makes it necessary to enact it immediately?

Cora Chan: I think China genuinely sees Hong Kong as a security threat. Beijing genuinely considers, for example, that the protests last year indicate how Hong Kong might be used by foreign forces as a base for subverting the Chinese government.

For example, activities that some Chinese officials have cited as indicating the kind of security threat that Hong Kong poses include people waving Hong Kong’s colonial-era flag or waving American flags during protests and lobbying for the U.S. government to sanction Hong Kong and China.

Together with the fact that China sees that in the foreseeable future there would be no chance of a national security law being passed through Hong Kong’s legislature. [Editor’s note: Hong Kong’s legislature has been stalled for months owing to filibustering by pro-democracy lawmakers.]

Even if the local legislative council was able to pass a security law, it’s unlikely that such a law would meet China’s standard of security. So I think, coupled with COVID-19 [stopping people from going out to protest] right now, China thought this was the right time to do something to restore political and social stability.

What are some important issues that we don’t know about the impending law?

There are three key sets of unknowns about this law.

The first relates to the scope of power of the national security institutions that, according to the proposal, will be set up in Hong Kong. At the moment we don’t know whether those institutions will only have intelligence-gathering powers or whether they’re going to have law enforcement powers as well. For example, will they be able to arrest, detain, and interrogate people in Hong Kong? We don’t know.

The second very important unknown relates to the definition of the crimes of secession, subversion, terrorism, and the vague notion of foreign intervention. There are concerns that the crimes won’t be defined specifically enough nor defined in such a way that complies with Hong Kong’s common law legal system. The pan-democrats in particular worry whether peaceful advocacy for the democratization of China, for example, would violate the impending law.

The third set of unknowns is whether adjudication of this law is going to be within the power of Hong Kong’s courts. Then, even if so, there are also worries as to whether Hong Kong courts will have final powers of interpreting this law. From past experiences of dealing with the Chinese government we know it’s very important to know who has final say over what the law means.  

One of the provisions of this legislation is that it will permit agents of mainland China’s state security agencies to operate more or less openly in Hong Kong. Are there any assurances in the law to restrict or put limits on the way in which those security agents can operate?

I think the question of what scope of powers these national security institutions will have is one of the biggest concerns regarding the new law. There isn’t much detail about it in the National People’s Congress decision. I think for businesses or foreign companies operating in Hong Kong that will be a real issue because we’ve got to think of all of this in the larger socioeconomic political context.

We have a very volatile U.S.-China relationship, and we’re in the middle of a trade war. Given that China’s “national security” could be interpreted to include economic development, one concern for foreign companies with competitors in mainland China could be: Will national security agencies in Hong Kong, under the guise of national security, have power to extract information from my staff?

You said how Hong Kong’s judicial system is vital in supporting the city’s financial system and that the two together make Hong Kong an attractive place for foreign investors. Is it possible for Beijing to selectively impose the national security law without jeopardizing that synergy?

There’s been a lot of rhetoric around the introduction of this national security law being the end of the rule of law in Hong Kong or the end of “one country, two systems.” Is it possible for Beijing to deal with this such that they selectively use the law only against certain people but not target businesses and investors? The answer is an absolute yes.

So should investors and businesses be worried about this law? I believe we will see that, at least in the initial period, the law will be used in a restrained manner. It won’t be used to target businesses and investors in Hong Kong. Beijing has enormous vested interest in not tarnishing the perception of the rule of law and not tarnishing the perception of Hong Kong as an international financial center.

However—and this is a very important caveat—the fact remains that Beijing could use the law if and when it feels the need to protect its sovereignty and economic interests. The law might also have an indirect impact on businesses and investors. For example, there might be tighter censorship over the free flow of information or tighter state surveillance compromising privacy. Even just generally, if Hong Kong becomes a less free city there might be a brain drain as a result, and it could become more difficult to recruit talent.

There are all these ramifications that people in the boardroom will have to think about, and I don’t envy them.

This story is part of Eastworld Spotlight, a series of conversations on matters of business, tech, and finance with executives, experts, entrepreneurs, and investors in Asia. Subscribe to Fortune’s Eastworld newsletter to get them in your inbox.

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