How Hong Kong’s Change in U.S. Special Status Affects Gaming and Esports Investments

Written by Tobias Seck and James Fudge

Over the last few months, the Trump administration increased political pressure on the People’s Republic of China. Several actions proved to be rather media effective, the proposed bans of short-format video platform app TikTok owned and developed by Chinese company ByteDance and Tencent Holdings’ WeChat app; and Trump’s executive order to revoke Hong Kong’s special trade status of the United States-Hong Kong Policy Act of 1992. In a series of articles, The Esports Observer looked into the impact that the potential ban or sale of TikTok’s U.S. assets could have on the esports ecosystem. In this article, we’ll explore how Hong Kong’s revoked special trade status might influence the esports industry. 

Hong Kong: By the Numbers:

In 1992 Congress passed the United States-Hong Kong Policy Act, creating an environment that was beneficial to companies in both the U.S. and Hong Kong. The act was in response to the United Kingdom’s plans to turn over the city-state to China in 1997, with certain conditions, after 150 years of British rule. These conditions were codified in Hong Kong’s Basic Law, which was supposed to serve as its constitution for 50 years, or until 2047.

Since the Act was put in place, Hong Kong became one of the most important trade partners of the U.S. In 2018, Hong Kong, a Special Administrative Region of the People’s Republic of China, was the United States’ 10th largest goods export market, despite the large disparity in gross domestic products (GDP) as Hong Kong evolved into a trade hub to mainland China. In 2019, the United States was the country with the highest GDP of $21.4T USD, while Hong Kong only generated a GDP of $373B. U.S. exports to Hong Kong were $30.78B in 2019. 

The 1992 act of Congress enshrined a continuation of the relationship the U.S. had enjoyed with the city while under British rule, when many companies set up shop there because of its democratic independence from China (read: no red tape or regulations imposed by the Chinese Communist Party), while also offering the ability for U.S. companies to have access to Mainland China’s markets. Travel between Hong Kong and the U.S. was seamless making it easy for executives to conduct business in America, and goods traded between the two had no tariffs. 

That handover happened in 1997, and Hong Kong was deemed to be under a “one country, two systems” rule where it would be considered a part of China but would have its own capitalist-focused laws and system of government. But in 2019 everything changed when it seemed that Hong Kong’s top leaders had abandoned important tenets of the Basic Law and aligned with China.

The Perils of Wading Into Geopolitics

It’s likely that the esports and video game industry and its hundreds of millions of fans hadn’t really paid much attention to the Hong Kong pro-democracy protests prior to October 2019. On Oct. 6, 2019, during a live stream of the Hearthstone Grandmasters event in Taiwan, pro Hearthstone player and Hong Kong resident Chung “blitzchung” Ng Wai donned a gas mask and goggles (symbols to represent the resistance in the Hong Kong protests that had been going on since March 2019) and said, “Liberate Hong Kong, revolution of our times.” The casters interviewing him ducked under their desk, chuckled nervously, and the stream went off the air abruptly. A day later Blizzard announced that Chung had been banned from the current tournament, would be forced to forfeit his prize money (roughly $4K), and would be barred from other Grandmaster tournaments for a year. The company also announced that it had terminated the contracts of casters “Virtual” and “Mr. Yee” (real names unknown).

The backlash from the community was swift as fans accused Blizzard of being a pawn of the Chinese Communist Party government and infringing on the free speech rights of all involved in the incident. On Aug. 12 Blizzard President J. Allen Brack admitted that the company handled the situation poorly, reduced Blitzchung’s and the casters’ bans to six months, and restored his prize winnings. 

Not satisfied with Blizzard’s response, protests continued against the company leading into BlizzCon 2019, the company’s annual fan event. Brack opened the event by admitting that the entire ordeal was not handled well: “We didn’t live up to the high standards we set for ourselves and we failed in our purpose.”

While the Blizzard situation was likely the first introduction for those who pay attention to esports, pro-democracy protests had been going on since March 2019 and the situation was getting increasingly dangerous politically. Over a year later the situation hasn’t gotten any better for protestors and journalists who find themselves targets as China uses a recently enacted security law to crack down in Hong Kong. That security law was the final straw for the U.S. government, and on July 15, U.S. President Donald Trump issued an executive order eliminating Hong Kong’s protected status and a nearly 20-year relationship of cooperation. 

While Blizzard was in the midst of its Hong Kong protest controversy, Riot Games was stepping into one of its own. The League of Legends maker, which is 100%-owned by Chinese conglomerate Tencent Holdings decided to publicly state that it didn’t want on-air talent weighing in on the Hong Kong situation. On Oct. 11, 2019, Riot Games’ Global Head of League of Legends Esports John Needham issued a public statement revealing that casters and players were told not to share sensitive topics such as politics or religion.

This announcement followed a controversy where viewers alleged that Riot was purposely preventing on-air talent from saying the full name of the League of Legends Master Series team Hong Kong Attitude. Riot Games Communications Lead Ryan K. Rigney later released a statement on social media saying that there was no concerted effort to force on-air talent to omit the words “Hong Kong.”

Meanwhile, Fortnite maker Epic Games, which Tencent Holdings owns 40% of, went on the record to say that it “supports everyone’s right to express their views on politics and human rights,” and that “We wouldn’t ban or punish a Fortnite player or content creator for speaking on these topics.” 

All of this happened seven months into the Hong Kong protests.

This leaves open the question of whether the strain in U.S.-China relations and the change in preferred or protected status for Hong Kong means much of anything to companies that are not from the United States or Europe. But it also opens up the possibility that there are fewer advantages for companies who once used Hong Kong as a gateway to business in Mainland China or as a place for companies to secure funding. Before we dive into that, let’s briefly walk through how the situation has escalated over the last year or so.

What Changes for Hong Kong

Trumps’ executive order signed on July 13 went into full effect in mid-August. Here are some of the things that will come out of that order: 

Hong Kong will lose U.S. preferential treatment for Hong Kong passport holders, meaning that it will be a lot harder to travel back-and-forth between the two countries and adds layers of restrictions on immigration. This is due to the fact that HK passports will be treated as if they were issued in China, opening up holders to more restrictions and deeper scrutiny.

Police and security training between the U.S. and Hong Kong will also end, as well as the extradition of fugitive offenders between the two countries.

Lower trade tariffs and a separate customs framework that made trade between the U.S. and Hong Kong easy will change dramatically. The cost of sending goods back and forth will also increase, as well as regulations on the items being traded. 

Licenses that made exports of defense equipment, dual-use technologies, and high-technology products to Hong Kong will be revoked, adding new layers of restrictions.

Sanctions against some Hong Kong politicians have already begun, but more sanctions affecting businesses may be put in play. For example, getting loans from U.S. banks and foreign-currency offers will be curtailed or banned.

Goods in Hong Kong may be forced to be labeled as “Made in China” if imported to the U.S., something the Hong Kong government is very displeased with and already vowing to push back on with the World Trade Organization. 

Finally, one thing that won’t change is that Hong Kong will probably not lose its status as an independent customs territory because it is recognized as such by the World Trade Organization.

Timeline: The Fall of Hong Kong’s Protected Status

1992: Congress passes the United States-Hong Kong Policy Act giving Hong Kong protected status prior to the United Kingdom handing over the city to Mainland China, with the United States treating Hong Kong separately from Mainland China when it came to trade exports and economic controls.

1997: UK Government hands over HK to China after 150 years of rule under a “one country-two systems” policy whereby HK would be part of China but have its own independent system of government.

February 2019: The Hong Kong government proposes the Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation (Amendment) Bill, which would establish a mechanism for transfers of fugitives not only for Taiwan, but also for Mainland China and Macau, which were (at the time) excluded in Hong Kong’s existing laws. 

March 15, 2019:  Large-scale pro-democracy protests begin. 

May 21, 2019: The U.S. Congress passes the Hong Kong Autonomy Act, which requires an annual review of Hong Kong’s independent status from China by the Secretary of State.

Sept. 2019: HK government withdraws bill but continues to push some elements of it. Protests continue (and still continue to date).

October 2019: Hong Kong government bans wearing masks, which critics view as a move for police and the government to more easily identify protesters. Activision Blizzard and Riot Games wade into the controversy and are criticized for being too cozy with the government of the People’s Republic of China due to its various business ties with companies in Mainland China. 

May 27, 2020: As part of an annual review of HK (as per the law passed in 2019), Sec. of State Mike Pompeo issues guidance to congress/president that HK is no longer autonomous/independent from Mainland China.

June 29, 2020: China passes new security law for HK.

July 15, 2020: President pens executive order, which goes into effect July 30. 

July 30, 2020: U.S. government notes that HK has a 45-day grace period when it is officially recorded in the Federal Register.

August 10, 2020: The Hong Kong Economic and Trade Office in Washington D.C, an official representation of the Hong Kong Special Administrative Region (HKSAR) to the United States, issues a statement condemning the executive order.

August 2020: China uses new security law to crack down on protesters and journalists.

Impact on China’s and Hong Kong’s Esports Ecosystem

According to a survey conducted by the American Chamber of Commerce in Hong Kong, 60% of the respondents, a majority of whom are U.S. companies, are certain that Trump’s executive order to revoke Hong Kong’s special trade status will harm their business operations. Nevertheless, 70% of respondents have no plans to move from Hong Kong and want to wait to see how the situation plays out.

While Hong Kong isn’t home to many relevant companies within the esports ecosystem, several have built offices in the city to run their China and Asia business from there. Esports title developers and tournament/league organizers such as Riot Games, Electronic Arts, Ubisoft, and ESL have Hong Kong offices, which might lose part of their relevance. While Hong Kong will remain an attractive location for factors like geographic accessibility and local talent, the revocation of Hong Kong’s special customs status will impact how those offices are used to organize foreign revenue streams.

Furthermore, several Chinese esports-relevant companies have Hong Kong offices and subsidiaries, including Tencent Holdings, Alibaba, Bilibili, Netease, and Razer.

Hong Kong-based esports organizations including Hong Kong Attitude, G-Rex Gaming, and League of Legends World Championship participant Talon Esports are unlikely to face many of the consequences of the move despite the impact that the revocation of visa-free travel between the United States and Hong Kong will have.

The biggest impact on the esports industry is to be anticipated for Chinese companies. Since the Act was established in 1997, Hong Kong’s financial and business status was increasingly used to move money in and out of China. Since 1997, Chinese companies have raised more than $335B on the Hong Kong stock exchange (HKEX), which is roughly 80% of all capital raised by Chinese companies in non-Chinese equity markets. Tencent, Netease, and Razer are among those companies that are listed on the HKEX. In comparison, only $268B was raised by Chinese companies on the Shanghai stock exchange (SSE) during the same period.

As a consequence of the removal of Hong Kong’s special trade status, the financial relationship between the U.S. and Hong Kong will become more restrictive and might result in a significant scarcity of investments and capital supply for Chinese companies in the future. As the esports industry is still in a rapid growth phase, access to capital can be crucial for many esports companies’ business models. Therefore the move does bring new challenges to any Chinese business trying to scale its operations as about two-thirds of all foreign inbound investment flows into China go through Hong Kong.

Note: While publicly traded companies such as Tencent, Alibaba, Huya, DouYu, Bilibili, Netease, and Alibaba are commonly referred to as Chinese companies, all those companies are incorporated on the Cayman Islands.

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