For two months, the people of Hong Kong waited in suspense after China’s legislature approved a new national security law. The legislation’s details were finally made public yesterday and almost immediately went into effect. As many Hong Kong residents feared, the broadly written new law gives Beijing extensive authority over the Special Administrative Region and has the potential to sharply curtail civil liberties.
In response, the United States began the first measures to end the special status it gives to Hong Kong, with the Commerce and State Departments suspending export license exceptions for sensitive U.S. technology and blocking the export of defense equipment.
Much remains uncertain. Hong Kong had also previously enjoyed many freedoms that do not exist in mainland China, under the “one country, two systems” principle put into place after the United Kingdom returned control to China. After announcing the new policies, the U.S. government said further restrictions are being considered. Under special status, Hong Kong had privileges including lower trade tariffs and a separate customs and immigration designation from mainland China, but now the future of those is unclear.
Equally opaque is how the erosion of special status and the new national security law will impact Hong Kong’s startups in the future. In conversations with TechCrunch, investors and founders said they believe the region’s ecosystem is resilient, partly because many companies offer online services — especially financial services — and have already established operations in other markets. But they are also keeping an eye on further developments and preparing for the possibility that key talent will want to relocate to other countries.
Born and raised in Hong Kong, Alfred Chuang co-founded enterprise application infrastructure solutions provider BEA Systems in 1995, which was acquired by Oracle in 2008 for $8.6 billion. Chuang is now general partner at Race Capital, a venture capital firm he co-founded in 2019. For entrepreneurs and foreign tech companies, Hong Kong’s autonomy and special status made it a “magical place,” he said.
“Technology companies want to go to Hong Kong. Facebook, all those large companies, have offices in Hong Kong because every building has fiber-optic lines and there’s incredible bandwidth, free access to every site, no restrictions on press, data access or any website,” Chuang added.
Startup founders also have less concerns about tax or cross-border transactions than they would have had in mainland China, and access to almost all cloud-based services, including authentication and security tech, with servers based in the United States.
Depending on the extent of the United States’ rollbacks on special status, a lot of Hong Kong’s appeal to American tech companies and talent may be eroded.
“Our relationship with the U.S. has developed for so long and it’s mostly because Americans really wanted to do business out of Hong Kong to the rest of Asia,” he said.
The Hong Kong dollar peg is also a major part of its appeal for companies. Since 1983, the Hong Kong dollar has been pegged at a rate of about 7.75-7.85 per U.S. dollar, giving it stability and making it easy to convert, which made the city especially attractive to investors. But Chuang said if the peg is rescinded, the impact would be “disastrous.”
“At least for the short term, Hong Kong would see a major fluctuation in its currency,” Chuang said. “You might say, well it’s part of China, so why isn’t it pegged with currency in China? But that’s because Chinese currency is not open.”
Even though the removal of special status is aimed at Beijing, what it will ultimately do is hurt Hong Kong entrepreneurs by making their future in the city uncertain, said Edith Yeung, general partner at Race Capital.
She noted that many of Hong Kong’s most successful startups, including GoGoVan and Lalamove, which both offer on-demand logistics services; financial services provider WeLab; and travel booking platform Klook, have founders who were educated in the United States, but returned to Hong Kong to start up their companies.
“They were highly influenced by the U.S., but they decided to move back to Hong Kong because it’s a great place to be. Hong Kong is a financial hub and, in my mind, it’s right after New York and London, particularly for public listings and IPOs,” she said.
If the U.S. continues to rescind different parts of Hong Kong’s special status, however, that may hurt the exchange of ideas and talent between the two places as founders look toward other markets.
“It’s unfortunate that all of us need to be aware, because this is in front of us. But I can tell you a few things. We already have a digital divide and now it really depends on if the founders want their main business to be in mainland China. If it’s not in mainland China, I don’t want to say it would be in the U.S., either,” Yeung said. “The first place they usually want to go to is Taiwan. In terms of growth, they usually start with Taiwan and they think about Southeast Asia, too.”
As an investor, Chuang said the loss of special status does not change his approach to investing in promising Hong Kong startups.
“If something happens to them, if I am really worried enough, I will talk to them and say we need to do some hedging. That means we will talk to them and say, maybe some of the cash they hold in hand, the receivables they have in hand, has to be in a place where it would not be in Hong Kong dollars,” he said. “The second part would be, in the back of my head, to say if it becomes really bad and U.S. sanctions have hurt the company so much, then we might have to move them.”
Chuang added he thinks the possibility is still remote, however, and nothing that extreme will happen before the U.S. presidential election.
One example of a Hong Kong startup that sells online services is GoodNotes, an app for taking notes and organizing documents. Founder Steven Chan said it has more than three million weekly active users, 99% of whom are located outside of Hong Kong. If the Hong Kong dollar peg is lost, Chan said he does not foresee a major impact on GoodNotes’ operation, but the company may consider converting its savings, most of it in Hong Kong dollars, to another currency.
Most of GoodNotes’ team is based in Hong Kong, with a few working remotely from Germany and Vietnam. “We plan to remain and continue operating in Hong Kong at least in the short term, because we have a great team and not everyone can relocate,” he said. “Internally, we have been talking about setting up a satellite office somewhere else, but it is more about getting closer to our customers.”
“On the other hand, we are in the process of exploring re-structuring our legal entity to give us better protection in terms of intellectual property and other legal concerns,” he added.
Other tech companies have already begun looking at other countries in case their employees want to relocate, despite the high cost of setting up overseas subsidiaries. Some possibilities include Taiwan, Australia and Canada, all countries with entrepreneur visa programs.
Despite Singapore’s status as another Asian financial hub, Chuang said it is less attractive to Hong Kong entrepreneurs, in part because the city-state has a relatively small labor market.
But startups, especially ones that, like GoodNotes, offer online services, may prove to be resilient to any policy changes because many of them have diversified their markets, said Felix Wong, the Asia-Pacific head of growth for AngelHub, a startup investment platform based in Hong Kong.
Many founders launch startups with an eye already on expanding into other places, particularly Taiwan and Southeast Asian countries, simply because Hong Kong itself is a relatively small market.
“Most of them already established a diverse international footprint even before any policy changes were made. Startups that began in Hong Kong, quickly realize that running a business in Hong Kong’s market is not big enough or that they need to acquire talent overseas,” Wong said. “I think it is pretty common for them not to just look at one market, but several markets, in case there are any issues that come in. They always have a Plan B to continue the business.”
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