The fall of Hong Kong: India must change its approach to lure fleeing investments

“One China, Two Systems” was a mantra Beijing embraced after the United Kingdom’s 1997 handover of Hong Kong to Chinese sovereignty, ending more than 150 years of British control. Under terms of the agreement, Hong Kong would be a “Special Administrative Region” for 50 years, enjoying its own democratic system and free-market economy distinct from the Chinese Communist Party’s command and kleptocratic approach.

For Chinese Premier Zhao Ziyang, it was a dream deal. The Chinese leader probably never expected the British government to forfeit Hong Kong so readily. Unlike other colonial territories, there was no groundswell of popular support to cease their British identity. If put to a vote, Hong Kong citizens would endorse the status quo. Put another way, Hong Kong was more analogous to the Falkland Islands than it was to India. China was also far from the economic powerhouse it would become just a decade later. The 50-year pause before the transition enabled China to benefit from Hong Kong’s economic engine while providing the Communist leadership with an excuse not to ruin it.

Of course, it did not last. In 2020, Chinese Communist authorities in Beijing passed a sweeping national security law that eviscerated Hong Kong’s freedoms and protections. Seeing the writing on the wall, a trickle of banks and corporate offices began to relocate, many to Singapore. As the Chinese crackdown continued under Xi Jinping, this became a deluge.

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By 2023, Singapore hosted regional headquarters for 4,200 multinational companies, more than three times the number of those that make Hong Kong home. Microsoft, Google, FedEx, Apple, CitiGroup, and Rolls-Royce now maintain regional headquarters in Singapore. Driving around Singapore is to see brand new apartment blocks, office towers, and entire new neighbourhoods built to accommodate the flow of internationals fleeing Hong Kong.

Vietnam and Taiwan have also benefited as manufacturers flee Hong Kong for more business-friendly environs. Today, Vietnam is a regional hub for Unilever, Procter & Gamble, IBM, Microsoft, Honda, and Samsung. Vietnamese gross domestic product growth has averaged nearly seven per cent annually over the last decade. Even during Covid-19, growth continued, albeit at a reduced rate of 2.5 per cent.

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As PM Narendra Modi begins his second decade as prime minister, he has already secured a legacy as India’s most consequential leader since Jawaharlal Nehru and Indira Gandhi. Infrastructure investment has enabled India to jump-start its economy, which is now on pace to surpass Japan’s and Germany’s to become the world’s third-largest. The proportion of Indians living in poverty has halved over the last five years. Less than three per cent of the population lives in extreme poverty as defined by the United Nations.

India’s human capital is perhaps the best in the world; indeed, cutting-edge American industries such as rocket science, superconducting ceramics, and nanotechnology depend upon Indian emigres and graduate students. It is no coincidence that Huntsville, Alabama, aka “rocket city”, has both the greatest per capita number of engineering degrees in the United States and a disproportionately large Indian community.

Alas, while India hosts its share of multinationals ranging from Amazon, Apple, IBM, and Google to India’s own Tata Group and Aditya Birla Group, its capture of the share of businesses relocating from Hong Kong pales behind Singapore. That India lags in its multinational capture as so many companies flee China or adopt a “China plus one” strategy to hedge their bets represents opportunity lost. Vietnam may have human capital, but its potential workforce is still only a fraction of India’s. That Vietnam remains a one-party socialist dictatorship and still captures a large share of businesses fleeing China suggests Hanoi is doing something right to ease bureaucracy to attract multinational business that New Delhi is not.

For India to profit from ‘de-risking’ China should not only be an economic issue, but also a national security one. The more external firms that call India home, the more India will enjoy global diplomatic influence beyond simply its regional military power. As China continues to encroach on Indian territory, as Pakistan continues to sponsor both terrorism and Khalistani separatism, and as Turkey and Canada fan the twin flames of Islamist radicalisation and Hinduphobia, India’s ability to leverage multinational firms’ influence in home capitals will become ever more important. The fact that such firms not only contribute to India’s tax base but also create a climate within which small and medium enterprises can grow and thrive should only make the imperative to attract multinationals more compelling.

To approach the entrance of foreign firms to the Indian market through the lens of economic protectionism and sovereignty is to miss a huge opportunity. Indian leaders must ask themselves why so many foreign firms, with China having ruined Hong Kong, now turn to any country besides India. The answer to that question and the implementation of policies to remove the hurdles will determine whether India will remain simply a regional power or truly rise to become a global economic superpower.

Michael Rubin is a senior fellow at the American Enterprise Institute and director of policy analysis at the Middle East Forum. The views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.