(Bloomberg) -- Hong Kong just passed its local security law at record speed, placating Beijing and antagonizing Western governments. It now has the challenging task of bolstering the city’s position as an international finance center.

The city’s leader John Lee has repeatedly said a pressing need to focus on economic development was one of the reasons behind expediting the legislation. Since coming to power in 2022, Lee has prioritized national security, even at the cost of Hong Kong’s reputation as a freewheeling hub. While his administration has taken steps to boost overseas investment and stimulate spending, the city’s financial markets are in the doldrums and the economy is struggling.

The question now is whether the government will be able to achieve success, given growing concern internationally over the city’s future following the new security law, as well as numerous headwinds from China’s slowdown to tensions between Washington and Beijing.

“This might be an opportunity for Hong Kong to refocus on the economy,” said Dongshu Liu, an assistant professor specializing in Chinese politics at the City University of Hong Kong. “Whether the Hong Kong government will actually do it, that’s another story.”

At stake is the future of one of the world’s most important finance hubs. Hong Kong is both a key fundraising center for Chinese companies seeking access to international capital markets and the primary conduit for foreign firms to invest in China. 

While companies are increasingly choosing Singapore as their Asian base, Hong Kong’s role as a financial center dwarfs that of its rival. The city continues to be home to the Asian headquarters of Wall Street banks and its $4.8 trillion stock market is the world’s fourth largest. 

Read more: The Rich Flock to Singapore as Bankers Stick With Hong Kong

Yet Hong Kong’s challenges are mounting. Borrowing costs have surged due to a currency peg with the greenback. Expats and younger locals have left in droves as financial sector jobs dry up and concern mounts over Beijing’s greater oversight.

More broadly, foreign capital is increasingly shunning China at a time when the country’s slowdown is weighing on domestic consumption. Beijing’s crackdowns have ensnared industries from tech to property, with multiple developers defaulting on their debt. 

Hong Kong’s critical role as a conduit of capital for China means the city’s success has national importance. President Xi Jinping tasked Lee with strengthening Hong Kong’s position as an international financial center when he visited the former British colony in 2022 for Lee’s inauguration.

In a sign that Beijing is growing concerned, officials from China’s Ministry of Finance traveled to the city in December to meet with bankers from firms including HSBC Holdings Plc and Standard Chartered Plc to discuss ways to bolster the city’s hub status.

“The mainland regime wants foreign investment and free trade,” said Carsten Holz, professor of economics at Hong Kong University of Science and Technology. “The last thing it needs is for unfavorable Hong Kong news to keep flashing over Western viewers’ television screens.”

The need for Hong Kong to restore its appeal is becoming urgent. Its property market is in a downward spiral, with home sales last year falling to the lowest in nearly three decades and office vacancies at a record high. Local stock benchmark the Hang Seng Index has lost more than 40% in the past three years, compared with a 15% gain by MSCI Inc.’s gauge of global shares.

Yet Hong Kong’s ability to navigate major obstacles is limited, according to Chong Ja Ian, associate professor of political science at the National University of Singapore.

“Hong Kong’s economy mainly depended on being a conduit between China and the rest of the world,” said Chong. “When China is facing more economic headwinds and foreign policy friction, other governments divest and diversify. Those options are unavailable to Hong Kong.”

Paul Chan, the city’s financial chief, vowed last month to make the city more appealing to businesses and talent. Speaking at the annual budget, he said the Middle East and Southeast Asia are potential new sources of capital, adding that the city’s stock exchange will work to attract issuers from countries in those regions. Chan last year led trade groups to Europe and the US to boost Hong Kong’s attractiveness as the city reopened from Covid Zero.

Read more: US Firms Want Hong Kong to Stop Talking About National Security

For many Western governments, the new law presents a potential threat to businesses operating in Hong Kong, which may overshadow the city’s aim of focusing on economic development. 

Under the law, authorities will have wider tools to minimize dissent, while police will be given expanded powers. The legislation’s broadly defined state secrets offenses bring Hong Kong in line with China’s vague legislation around espionage, which has spooked foreign investors over the past year. 

The bill “could exacerbate the erosion of fundamental freedoms” in Hong Kong, the European Union said in a statement Tuesday. A US State Department spokesman said the law could “accelerate the closing of Hong Kong’s once-open society.” The law will have “far-reaching implications,” UK Foreign Secretary David Cameron said in a statement.

Hong Kong government officials have said the law is based on similar legislation in countries such as the US and UK, while human rights and free speech will be protected under the law, which received popular support during a public consultation period.

Read more: Why Hong Kong Is Passing Another National Security Law: Q&A

Since the handover in 1997, Hong Kong was required under its mini-constitution to enact its own security legislation, but previous administrations failed to do so due to strong public opposition. Beijing imposed its own national security law on Hong Kong in 2020 in the wake of pro-democracy protests. That gave local officials the power to crack down on dissent and clear the path for the new law.

The 212-page bill was approved unanimously late Tuesday by a legislature cleansed of opposition, 11 days after it was introduced. It was the fastest passing of a bill since the city’s return to Chinese control. The law will become effective on Saturday after Lee signs it.

--With assistance from Alan Wong and Shawna Kwan.

©2024 Bloomberg L.P.