Tech start-ups begin to leave HK because of new security law

Hong Kong entrepreneurs are facing concerns from overseas clients and suppliers about the implications of running data and Internet services under the city's new national security law.
Hong Kong entrepreneurs are facing concerns from overseas clients and suppliers about the implications of running data and Internet services under the city's new national security law.PHOTO: AGENCE FRANCE-PRESSE

HONG KONG • China's sweeping national security law has forced technology firms to reconsider their presence in Hong Kong. The nimblest among them - start-ups - are already moving data and people out or are devising plans to do so.

Entrepreneurs now face a wave of concern from overseas clients and suppliers about the implications of running data and Internet services under the law's regime of expanded online policing powers. Many are making contingency plans and restructuring their operations away from Hong Kong.

Their actions may foreshadow similar moves by Internet giants such as Facebook, Alphabet's Google and Twitter. The larger firms are taking time to fully assess the impact of the law, while sentiment in the city itself is dour, with about half of US business people saying they plan to leave, a recent poll by the American Chamber of Commerce in Hong Kong shows.

"We are in a dilemma. If we follow the law in Hong Kong, we may violate other countries' regulations," said Mr Ben Cheng, co-founder of software firm Oursky. "We worry that people will not trust us some day if we tell them we are a Hong Kong-based company."

Oursky has already had trouble in the short period since the law took effect, with some foreign cloud service providers refusing to work with Hong Kong-based entities, Mr Cheng said. To circumnavigate these issues, his company will set up offices in Britain in about a year and then expand to Japan.

Tech companies that handle data are particularly vulnerable. The police can ask them to delete or restrict access to content deemed to endanger national security, with non-compliance punishable with a fine of HK$100,000 (S$18,000) and six months in prison for representatives of infringing publishers. Such provisions put technology firms under "tremendous risk and liability", said Hong Kong lawmaker Charles Mok. "It's a signal to these companies to be very careful. If you want to be safe and you don't want the uncertainty, then maybe you have to leave Hong Kong."

In recent years, the global financial centre has grown into an attractive destination for fintech entrepreneurs, and its close proximity to Shenzhen and the so-called Greater Bay Area has helped foster research and development ties between start-ups and Chinese universities. Hong Kong had been expected to reach US$1.7 billion (S$2.4 billion) in data centre revenue by 2023, rivalling nearby Singapore whose server market brought in US$1.4 billion last year, data from Structure Research shows. All that is now under threat.

Over half of Measurable AI's clients are United States-based. The Hong Kong firm tracks business receipts and provides transactional data to hedge funds and corporations, many of which are concerned about how data trade may be affected by the Beijing law and Washington's retaliatory measure of rescinding Hong Kong's special trade status. "Right now might be a good time for us to rethink how we can restructure or have the operations outside of Hong Kong," co-founder Heatherm Huang said, adding that the company is accelerating plans to migrate parts of its business development and sales to Singapore and New York.

Mr Scott Salandy-Defour, co-founder of energy-tech start-up Liquidstar, said: "Doing a start-up in Hong Kong is already difficult. It's a super expensive city." Even before the new law, the situation in the city was fraught with US-China tensions over everything from trade to human rights. Investors have become very cautious about people and businesses with ties to China and the new law "is like the last nail in the coffin", said the entrepreneur, who is now planning to relocate to Singapore.

In recent years, the global financial centre has grown into an attractive destination for fintech entrepreneurs, and its close proximity to Shenzhen and the so-called Greater Bay Area has helped foster research and development ties between start-ups and Chinese universities. Hong Kong had been expected to reach US$1.7 billion (S$2.4 billion) in data centre revenue by 2023, rivalling nearby Singapore whose server market brought in US$1.4 billion last year, data from Structure Research shows. All that is now under threat.

But Chinese University of Hong Kong's associate professor of economics Terence Chong said: "This would be just a short-term phenomenon. I think after they understand the society is more stable, businesses will come back. Hong Kong is the gateway to China. If they want to have access to China's market, it is the best place for them."

Supporters of the law see it as necessary to restore investor and business confidence by curbing months of sometimes-violent unrest that have rocked the city.

 
 
 

For some, the allure of closer integration with China through the Greater Bay Area is too good a chance to pass up. "I think Hong Kong can still play the role it's always played, bringing international and Chinese players in technology closer together," said Mr Tony Verb, co-founder of GreaterBay Ventures. "I don't see reasons right now to run away."

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A version of this article appeared in the print edition of The Straits Times on July 22, 2020, with the headline 'Tech start-ups begin to leave HK because of new security law'. Subscribe