HKW submission to the House of Lords: China, Human Rights, and the International Financial System
In March 2021, Hong Kong Watch published an in-depth report (Hong Kong Watch, 2021) on the effect of the influx of red capital – i.e. mainland money and assets – on the political situation in Hong Kong. One of the concluding remarks in the report is that greater scrutiny must be placed on the ties between China and the West’s financial systems given the limited understanding in policy circles about these issues and the way that Beijing coopts state capital for political ends.
This submission has been written as a follow-up piece of research by the report’s authors, Johnny Patterson and Sam Goodman. It considers the risks to investors, for human rights and for national security associated with deepening ties between China and international finance. The full submission can be read here.
Summary
Section 1: Despite the Trade War, Ties between China and Wall Street and the City of London are growing.
- Nervous about a potential debt trap and vulnerabilities in the domestic financial system, the Chinese government has opened China’s markets in unprecedented ways. Western investors have cashed in, in what has proven so far to be a win-win for the Chinese authorities and international financial firms.
Section 2: Problems with increased ties between China and Global Finance
1. The opacity of China’s financial markets leaves investors exposed. While some professional financiers with years of Asia experience may have adequately factored in the risks, there are many more casual investors who may not fully appreciate the risks associated with investing in China.
2. Ethical concerns associated with institutional investment in China have not been carefully considered by institutional investors. There is currently no regulation in place to ensure that firms avoid investing in corporations complicit in the creation of the Xinjiang surveillance state. China and its human rights violations should be an ESG issue.
3. China’s strategy of military-civil fusion ensures that unchecked institutional investment could directly counter Britain’s national security interests if British pensions funds and other major players are funding firms in partnership with the Chinese military.
Section 3: Lessons to learn from the United States
- The United States Congress and recent American administrations are beginning to take these issues seriously and may provide lessons for Britain.
Recommendations
The British government should:
Consider policy solutions and regulations which will ensure that complicity with the gross violations of human rights in mainland China and Hong Kong is viewed as an Environmental, Sustainability and Governance (ESG) issue by investors.
Apply financial sanctions on firms complicit in the creation of the Xinjiang surveillance state and gross human rights violations.
Consider enacting legislation like the US Hong Kong Autonomy Act and Uyghur Forced Labor Protection Act.
Ensure that no state-pension funds invest in firms complicit in gross human rights violations.
Bar passive index-tracking funds from investing in firms complicit in gross human rights violations.
Research and consider the financial risks associated with greater exposure to Chinese financial markets.
Demand that institutional investors account for human rights factors in their ESG reporting relating to China with a specific focus on forced labour and Xinjiang.
Enact legislation establishing an independent watchdog, the China Economic Data Coordination Centre, to collect and publish official and unofficial Chinese economic data and assess British exposure to risk. This could be developed along the lines laid out in the US-China Economic Security and Review Commission’s (USCC) recent report to Congress (USCC, 2020: 538).