China’s introduction of a new security law in Hong Kong has set a different level for U.S.-China friction, with mutual condemnation and official-level antipathy in recent memory. Within weeks, the United States made some major statements about Hong Kong, the South China Sea, and specific actions in technology, space, and new limitations on corporate activity. To learn more, GLG sat down with Kurt Tong, who was the U.S. Consul General in Hong Kong and Macau during pivotal years from 2016-19. Below are a few select excerpts from our broader discussion.

 Could you elaborate on the wider U.S.-China dynamic, as well as how the U.S. might look to reestablish a long-term strategy?

The U.S. domestic political aspect is quite important. The upcoming U.S. presidential election is a fierce battle for control of the government with very high stakes. The main thing to watch is what tensions will look like after the election. Certainly, if Biden is president — and perhaps even if Trump is president — the frenzy of anti-China conversation will likely die down somewhat.

A complicating factor is that COVID-19 first started in China and there is a psychological urge in the U.S. to project responsibility onto China. That’s something that Trump has embraced wholeheartedly as part of his election stance and his sales pitch to the American people. This makes China much more relevant as a foreign policy issue in an election than would normally be the case.

What about Hong Kong?

With the introduction of a new national security law in Hong Kong, the response from the U.S. was to “unrecognize” the city’s high degree of autonomy under U.S. law and start taking apart some of aspects of the official relationship with the city. The U.S. got rid of the extradition treaty and changed export control laws on Hong Kong. Neither of those has a huge impact on the city and its economy.

The U.S. has yet to raise tariffs on Hong Kong exports to the U.S. It is still possible. In the President’s executive order of July 14, there are some provisions about treatment of rules of origin related to Hong Kong exports.

I think the interpretation inside the administration in Washington is that the National Security Law is an unmitigated disaster and will have a big impact on the Hong Kong economy, society, and politics. Meanwhile, Beijing feels it has been successful. They have succeeded in getting people in the political realm to start self-censoring, with some political candidates deciding not to run and still others leaving the city entirely.

Is an entanglement strategy (coalition approach) still workable in the current geopolitical climate?

This is why you’ll find nearly every Asia specialist in the United States pulling for Biden. If in 2021 the U.S. goes back to all these countries — South Korea, Japan, European countries — and says, “Hey, we’re ready now. Let’s work together,” there is actually going to be a very enthusiastic reaction. I mean, there will be a little bit of slapping the U.S. and saying, “Well, where have you been for four years?” But I do think there’s an eagerness for something approaching normalization.

Are the Securities Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) going to push harder for audits of Chinese companies?

I think that there is a desire from the PCAOB and SEC to see the disclosure standards implemented by Chinese companies listed on U.S. stock exchanges improve. There was discussion about how there might be a break-off of the existing Memo of Understanding agreement with China. My own sense is that it is tactical and that the SEC’s objective is not to kick Chinese companies out of U.S. financial markets but rather to somehow use leverage to get Chinese companies to more accurately reflect their accounting situation within China and clearly characterize their risk and vulnerability from government interference.

Do you see capital growth in the U.S. being disrupted, specifically for those who have U.S. limited companies or are running U.S. institutions in Hong Kong?

I don’t see it being disrupted. When the notion was being discussed in some quarters of Washington, people who were suggesting the idea of [hitting Hong Kong and China harder in order to] force Hong Kong to no longer maintain the peg to the U.S. dollar aren’t financial people. They didn’t understand that in order to accomplish that de-pegging, you actually have to attack the value of the Hong Kong dollar, which has significant backing from Hong Kong authorities and the entire Land Bank that indirectly the Hong Kong government has access to. Plus, the resources of the mainland. As soon as that idea got to the Treasury-type people, it died quickly.

Is Hong Kong essentially already a post-2047 world?

Hong Kong is a very peculiar place, where in order to prosper it needs to maintain good access to the rest of the world. With China growing, they have good access to China, and the rules of the road allow Hong Kong to have a competitive advantage vis-à-vis the rest of China. Hong Kong can benefit from the one-country, two-systems model if they are working the way that they were working. The concern is that if Hong Kong’s autonomy starts to diminish significantly, it’s going to become a more difficult business environment with greater legal uncertainty. Some of that can be compensated for if China is growing and becoming more open.

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About Kurt Tong

Since July 2019, Kurt Tong has been a partner at The Asia Group, a strategy and capital advisory group based in Washington, DC, with an affiliated office in Hong Kong. Previously, Kurt was Consul General at the U.S. Department of State to Hong Kong and Macau. Before that he was Principal Deputy Assistant Secretary at the U.S. Department of State in the Bureau for Economic and Business Affairs. Kurt was also the Deputy Chief of Mission to Japan. Earlier in his career he was the First Secretary for Finance and Economics, while working at U.S. Department of The Treasury.

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This article is adapted from the July 29, 2020, Remote Roundtable “US-China Relations.” If you would like to speak with Kurt Tong, or any of our more than 700,000 experts, contact us.