In the News: Hong Kong National Security; More US Entity Listings; and Hang Seng Index Reform

As expected, the new law has sparked intense opposition with large-scale protests returning to the embattled city of Hong Kong over the weekend. Various business groups have also voiced concerns about the implications for foreign businesses and investors in the city. The American Chamber of Commerce in Hong Kong has sought clarification about the extent of the law and said that the law "may jeopardize future prospects for international business…" AmCham warns about the risk of the law worsening relations between China and the United States, as well as the possibility that Hong Kong loses the special trade status that the U.S. gives it under the 1992 Hong Kong Policy Act. Beijing's crackdown on foreign interference in the city may also add an element of risk to foreigners living in Hong Kong and make it more difficult to recruit and retain talent, AmCham said. It urges the Hong Kong government to ensure the safety of overseas executives and reassure international businesses in the face of growing uncertainty surrounding the future of the city.

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U.S. blacklists more Chinese entities through Entity List

The Trump administration has blacklisted more Chinese entities in its ongoing campaign against Chinese acquisition of U.S. technology. On May 22, the U.S. Commerce Department announced that it is adding 33 more Chinese governmental and commercial entities to its so-called "Entity List", effectively barring them from acquiring U.S. technology on national security grounds.

The Chinese entities affected include 24 companies with alleged ties to weapons of mass destruction and military activities, eight companies with links to China's alleged treatment of its minority Muslim population, as well as China's Ministry of Public Security Institute of Forensic Science. The companies affected include remote sensing company Skyeye Laser Technology and internet security company Qihoo 360 Technology Co.

Last May, the U.S. added Chinese telecoms giant Huawei to the Entity List followed by a host of Chinese artificial intelligence start-ups over alleged ties to the ongoing crackdown of the Uyghur population in Xinjiang province, which China denies. The U.S. Export Administration Regulations imposes additional license requirements and eliminates most license exceptions for exports and re-exports to entities listed on the Entity List. In recent weeks, the U.S. has sought to clamp down on exports to China that could be used for military purposes. On Apr. 28, the Commerce Department published new rules eliminating license exceptions for exports of controlled items for civilian end-use to China and imposed additional disclosure requirements, effective Jun. 29. The U.S. has also tightened its grip on Huawei by barring chipmakers globally from selling to Huawei without U.S. approval if the chips are made using U.S. technology or equipment.

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Alibaba, Xiaomi to join Hong Kong's benchmark Hang Seng index

Chinese tech companies such as e-commerce giant Alibaba and smartphone maker Xiaomi are set to be included in Hong Kong's benchmark Hang Seng index. The Hang Seng Indexes Company announced on May 18 that companies with weighted voting rights (WVR) and secondary listings will be included in the index for the first time.

The rule change, set to come into effect in August at the earliest, paves the way for index inclusion of Hong Kong-listed Alibaba, Xiaomi and Meituan, all of which have WVR. Alibaba is also listed on the New York Stock Exchange. According to Reuters, the three companies rank among the top five stocks traded in Hong Kong by value. The benchmark index has traditionally excluded companies with WVR and secondary listings over concerns surrounding the fairness of their share structures as well as looser disclosure requirements for secondary-listed companies. As part of the new rules, Hang Seng will only count the shares of secondary-listed companies registered in Hong Kong.

WVR results in dual-class share structures, a common practice among both Chinese and foreign tech companies including Alibaba, Facebook and Google as the structure gives the company's founders greater control. Both Chinese and Hong Kong regulators have reformed rules surrounding such share structures in recent years. In 2018, the Hong Kong Stock Exchange enacted its most significant reforms in three decades when it allowed companies with weighted voting rights to list there for the first time. In August 2019, the Shanghai, Shenzhen and Hong Kong exchanges agreed to allow mainland investors to conduct "dual-class share trading," which led to mainland investors being able to trade shares of Xiaomi and Meituan for the first time through the Stock Connect program.

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