The Fall of Hong Kong: How China-US Rivalry Ended a Geopolitical Neutral Zone

In a meeting of the U.S. National Security Council held on June 8, 1960, John F. Dulles, the secretary of state of the Eisenhower administration, made an interesting comment on Cold War Hong Kong: “Hong Kong exists because it is useful both to the Free World and the Sino-Soviet Bloc.” Sixty years later, Dulles’ comment remains insightful to understanding Hong Kong today.

In recent years, many people have talked about the fall of Hong Kong. But different pundits have quite different focuses. A first perspective attributes the fall of Hong Kong to the erosion of its political freedom, highlighting the backsliding of its freedoms of speech, press, and protest. A second perspective perceives the fall of Hong Kong as a breakdown of its autonomy, focusing on China’s absorption of its government, economy, and society into mainland systems. And a final perspective sees the fall of Hong Kong as a decay of its status as an international financial center, indicating its exodus of capital and talents.

All these perspectives have their own intrinsic logic. Yet, the loss of freedom, autonomy, and prosperity are symptoms – rather than causes – of Hong Kong’s downfall. Fundamentally, the fall of Hong Kong is caused by its demise as a “geopolitical neutral zone” between China and the United States.

From the Cold War to the post-Cold War, Hong Kong’s geopolitical neutrality not only attracted tremendous inflows of capital and talents, but it also enabled the city to be developed into a semi-democratic autonomy. But now it’s all over. For Hong Kong, the unfolding of China-U.S. New Cold War means that the city has lost the magic wand that has created its previous freedom, autonomy, and prosperity.

The Rise of Hong Kong From Cold War to Post-Cold War

In 1949, when the “Bamboo Curtain” had drawn down dividing Asia into communist and “Free World” countries, Hong Kong became an unique place in between the two rival camps. On the one hand, Hong Kong was geographically located at the doorstep of “Red China” and was a home to millions of ethnic Chinese. On the other hand, Hong Kong was a British crown colony and was diplomatically part of the Western bloc. Both the United States and China immediately realized Hong Kong’s unique geopolitical location and sought to make best use of the place to serve their own strategic interests.

For the United States, Cold War Hong Kong had critical strategic, political, and military values. Strategically, Hong Kong was the only place geographically connected with China while still being ruled by an ally. This made Hong Kong the best intelligence hub for the U.S. in Far East. Throughout the Cold War, the U.S. Consulate in Hong Kong served as Washington’s largest overseas intelligence apparatus. 

Politically, Hong Kong’s status as a capitalist enclave on Chinese soil also made it an ideal “political show window” for contrasting the backward conditions in communist China. To influence China through this show window, the United States provided massive economic aid to the British Hong Kong government and opened up its market to facilitate Hong Kong’s industrialization. Militarily, Hong Kong was a major rest and recreation base for U.S. forces deployed across Asia, especially during the Vietnam War.

For China, well before the founding of the People’s Republic on October 1, 1949, Mao Zedong had already made a strategic decision not to recover Hong Kong by force – a decision that was later formalized as the policy of “long-term consideration, full utilization.” Economically, Hong Kong as a free port separated from China meant that Beijing could make best use of it to develop international trade. This function became especially critical after the Korean War. Since then, China had heavily relied on Hong Kong to circumvent the U.S. trade embargo, importing Western equipment and exporting Chinese food products through the city. Hong Kong’s position as the “capital of overseas Chinese” also meant that it was China’s principal conduit for absorbing foreign remittances sent from Chinese diaspora members to their mainland relatives.

The United States’ and China’s interests in Cold War Hong Kong were clearly not entirely compatible. But throughout the Cold War, both powers exercised a high degree of restraint toward each other’s presence in the city. Instead of risking a geopolitical showdown, both sides sought to optimize their own strategic interests without provoking the other side. 

For example, U.S. intelligence activities in Hong Kong were seen by China as a threat to its national security. In order not to provoke Beijing, Washington, London, and Hong Kong worked together to confine such activities within the scope of “information campaigns.” Similarly, the United States tolerated China’s use of the city as its trading hub after the Hong Kong government agreed to impose a system of import and export certification in 1952. Put differently, the tacit mutual accommodation of the U.S. and China in Hong Kong transformed the city into a de facto geopolitical neutral zone during the height of the Cold War of 1950s-1960s. 

Moving into the 1970s, Hong Kong’s unique status as a geopolitical neutral zone was further consolidated under the wider context of China-U.S. rapprochement. Following U.S. President Richard Nixon’s visit to China in 1972 and formal normalization in 1979, economic engagement had dominated China-U.S. relations for four decades. This proved to be a historical window for Hong Kong’s economic take-off, enabling the city to thrive by serving as a distinctive bridge between the United States and Chins. 

Thanks to its common law system, British-style civil service, and close proximity to the mainland, Hong Kong was well-positioned to become the prime location for U.S. enterprises to set up regional headquarters for developing the Chinese market. Concurrently, Hong Kong was also the best location for Chinese firms to gain access to Western capital, markets, and technologies. The rise of post-Cold War Hong Kong as an international financial center in the 1980s-90s would be impossible without such a geopolitical foundation.

Of course, not all interests of the United States and China over Hong Kong were compatible in the post-Cold War period, as in the case of Cold War years. Despite the economic engagement policy, Washington still perceived Hong Kong as a political show window to influence China. But Hong Kong was no longer framed by the U.S. as a capitalist enclave vis-à-vis communist China as in the Cold War. Instead, it was highlighted by the United States as a lighthouse of democracy within China, especially after the 1989 protest movement ended with a crackdown in Tiananmen Square. Coincident with the semi-democratic reforms introduced by the British in the final days of its colonial rule, Hong Kong had attracted international NGOs (INGOs) and global media firms to set up regional offices for supporting their mainland operations. Evidently, post-Cold War Hong Kong was not only an economic base but was also a political outpost of the West.

This was surely not a development to be welcomed by China, particularly in the context of Hong Kong’s sovereignty transition during the 1980s-90s. In the eyes of Beijing leaders, taking back a democratizing Hong Kong with extensive Western presence meant bringing in a “Trojan Horse” – a big prize that China did not want to leave outside, but which could be destructive once taken inside. To hedge against this potential risk, China imposed a system of indirect rule under the 1990 Basic Law by handpicking the chief executive officeholders (through forming a pro-Beijing election committee) and delaying further democratic reforms (through withholding the power of approving changes). In 1992, Washington responded by passing the United States-Hong Kong Policy Act seeking to strengthen its oversight role over the implementation of the “One Country Two Systems” model.

But overall, the obvious China-U.S. differences over Hong Kong’s constitutional reforms did not disrupt the main pattern of their economic engagement. In fact, the United States exercised restraint by keeping a low profile on Hong Kong’s democratization for much of the post-1997 period, while China also exhibited restraint by tolerating Hong Kong’s opposition movements and the extensive presence of Western civil society organizations. 

Thus, Hong Kong remained a geopolitical neutral zone for much of the post-handover period, thriving economically as an international financial center while struggling politically to manage its underlying constitutional tensions.

The Fall of Hong Kong in the New Cold War

But Hong Kong’s status as a geopolitical neutral zone proved to be unsustainable as China-U.S. relations evolved from economic engagement to strategic competition in recent years. Since the mid-2010s, the United States and China have started to confront each other on a range of geopolitical issues, from Taiwan, Tibet, and Xinjiang to the South China Sea. It should not be surprising that the New Cold War would be extended to Hong Kong. The outbreak of 2019 Anti-Extradition Bill Movement in the city served as a catalyst that dramatically accelerated this process.

The protest movement triggered a competition-obsessed Beijing and Washington to go for a geopolitical showdown in Hong Kong – abandoning their decades of mutual accommodation. China had always guarded against the national security risk of the U.S. presence in Hong Kong. Unintentionally, the Anti-Extradition Bill Movement escalated the national security concerns of Beijing to an unprecedented level. 

Hong Kong activists’ global advocacy campaign, U.S. politicians’ high-profile support, and the passage of the Hong Kong Human Rights and Democracy Act were imminent national security threats in the eyes of Beijing leaders. At a time when China and the United States were already clashing over Taiwan, Tibet, and Xinjiang issues, Beijing perceived the unrest in Hong Kong as an U.S. attempt to arouse troubles in China’s periphery.

Believing that it is now powerful enough to redefine the “One Country, Two Systems” model on terms more favorable to its own interests, China considered itself no longer legally bound by the 1984 Sino-British Joint Declaration nor politically constrained by the 1992 U.S.-Hong Kong Policy Act. This drove China to make a dramatic decision to impose a National Security Law in Hong Kong on June 30, 2020.

For the United States, China’s decision to impose a National Security Law was a severe threat to the Western presence in Hong Kong. Washington worried that following the adoption of a mainland-style security law, Western business enterprises, news agencies, and NGOs would lose the common law protection that they had enjoyed for decades. U.S. politicians and officials also saw Beijing’s unilateral action as another revisionist threat to the rules-based international order, which violated its treaty obligations under the Sino-British Joint Declaration. These factors incentivized the U.S. to react strongly by revoking Hong Kong’s special status under the U.S.-Hong Kong Policy Act and imposing sanctions on Chinese officials.

In the latter half of 2020, China and the United States confronted each other over Hong Kong in a series of tit-for-tat actions. Apart from engaging in a diplomatic war-of-words and imposing sanctions against each other, the two superpowers also mobilized support from their own allies through the United Nations system. Acting and reacting to each other’s escalation, the U.S. and China were embroiled in a vicious cycle of geopolitical showdowns. The result was the demise of Hong Kong as a geopolitical neutral zone.

A Fall in Slow Motion, Not a Collapse

This exacerbated China-U.S. rivalry has had far-reaching impacts on Hong Kong. For decades, Hong Kong’s geopolitical neutrality was the very foundation of its freedom, autonomy, and prosperity. China-U.S. peaceful co-existence in the city had functioned as a magnet that attracted businesses, media, and NGOs from all over the world. Now, such a magnet no longer exists. 

Since 2020, Western businesses and talents have steadily retreated from Hong Kong. For example, more than 168 non-local companies have removed their regional headquarters in Hong Kong – with U.S. firms topping the list in the wider context of decoupling or de-risking – reducing the total number from 1,504 in 2020 to 1,336 in 2023. 

Global media firms and INGOs are also leaving. Hong Kong was once an international media hub, but now news bureaus such as the New York Times, Wall Street Journal, Washington Post, and AFP have relocated their regional offices to other Asian cities. Facing political risks under the National Security Law, Amnesty International and Human Rights Watch – two global human rights groups – both closed down their long-time regional offices in Hong Kong in 2021. Many other smaller INGOs, such as the New School for Democracy and Global Innovation Hub, also left quietly. 

Last but not least, middle-class professionals in Hong Kong are migrating to the West, bringing with them capital, skills, and knowledge. It is estimated that more than 200,000 Hong Kongers have emigrated since 2020.

But it is important to note that Hong Kong’s downfall thus far remains incremental – it has not been an outright collapse. Imagine Hong Kong as an ocean liner: It is now losing the fuel needed (exodus of capital, talents, and businesses) to sail as it used to. However, with a limited new fuel supply, this ocean liner can still float in the sea – at least for the time being – because it is not heading for a titanic-style shipwreck (systemic collapse).

Evidently, there are still several important factors keeping Hong Kong afloat, though it is unclear how long these will last. 

First, the British systems left over since 1997 have not yet been completely dismantled. Hong Kong courts may no longer function as guardians of human rights and a check-and-balance on government power anymore, but they still largely function well in commercial and civil litigations. Hong Kong’s public service, business regulatory regimes, and banking systems remain world-class by international standards. If these good governance systems can endure, the exodus of capital and talents from Hong Kong may remain incremental rather than rapid. The Article 23 national security legislation enacted by Hong Kong’s parliament on March 19 will be a critical stress test for these systems. 

Second, Hong Kong still has excellent public finance. By the 2023-24 fiscal year, it still maintained a fiscal reserve of HK$642.4 billion and has a very low level of public debt by world standards. The relatively stable public finance means that the Hong Kong government can still effectively maintain public services delivery, from education to welfare and health, which is a critical pillar for social stability. The slumping property and stock markets – which had significantly reduced revenues from land sales and stamp duties – are straining the public finance system, but an imminent budgetary crisis is still far off. 

Finally, the inflow of mainland capital, talents, and enterprises have to a certain extent plugged the leaking holes. The Hong Kong government has aggressively absorbed mainlanders through new immigration schemes in order to mitigate the impact of brain drain. More mainland enterprises have also moved into the city, partially compensating for the retreat of Western companies. Yet, the continuous slowdown of the mainland economy calls into question how far the Hong Kong economy could be sustained by the “China Factor.”

How Long Can Hong Kong Endure?

The only plausible path for Hong Kong’s turnaround is the phasing out of China-U.S. great power competition, which – if it happened – would offer a window for reviving some of its lost geopolitical neutrality. 

Historically, a tale of great power competition will often end in one of three ways: by great power war (which causes one of the powers to be defeated on the battlefield, such as Germany in 1918), by geopolitical burnout (which forces one of the powers to concede peacefully, such as the Soviet Union in 1989), or by an emerging common enemy (which causes rival powers to set aside their competition in order to contain a common enemy, such as the Anglo-Russian Entente amidst an emerging Germany in the late 19th century). 

Will China-U.S. rivalry head for any of these three scenarios – and, if so, when? 

This is the million-dollar question. History shows that great power competition often lasted for decades – not years – before it faded out through one of the three major avenues mentioned above. The current episode of China-U.S. rivalry only started to emerge in the mid-2010s. It would be unwise to predict that this round of great power competition will run out of stream anytime soon.

Can Hong Kong outlive China-U.S. great power competition? Time will tell. But time, unfortunately, appears not to be on Hong Kong’s side.

This article is updated and adapted from the author’s journal article, “Great Power Competition in Non-Sovereign Entities: US-China Tug-of-War Over Hong Kong, 1950-2020” in the August 2022 edition of Pacific Focus.