The proposed merger of Three and Vodafone raises questions about the special treatment of investment from Hong Kong

Foreign investment from Hong Kong has long been treated separately from investment coming from the People’s Republic of China (PRC), but following the introduction of the National Security Law and with a merger of telecom providers Three Mobile and Vodafone it may be time for governments reconsider this distinction.

When the telecommunications provider Three Mobile was launched in the UK in 2003 by CK Hutchison, owned by Hong Kong tycoon Li Ka-shing, regulators and government officials barely batted an eye-lid.

After all, in the five years that had passed since Hong Kong was handed over from British rule to the PRC the city and the Hong Kong tycoons that ran it were still viewed largely as autonomous from Beijing.

These same tycoons boasted close links with the UK business community and in some cases even donated to political parties, which afforded the view from the UK Government that foreign investment from Hong Kong should continue to be treated as separate from investment from mainland China

Twenty years later, few would agree that it is the local tycoons now that run Hong Kong. Instead, their influence has been subverted by the ideology of a one-man party state and the thousands of national security police who have marching orders from Zhongnanhai to maintain the ongoing crackdown in the city.

It is therefore unsurprising that the announcement last week that CK Hutchison has finalised a deal to merge with Vodafone to become the UK’s largest telecommunications provider, has been met this time with concern and calls for regulators to block the deal on national security and competition grounds.

Under the agreement, CK Hutchison based in Hong Kong would own forty-nine percent of the largest telecommunications provider in the UK with access to twenty-seven million UK customers mobile phone data. The combined group would also control almost half of the radio frequencies in the UK afforded to mobile providers.

The proposed deal between Vodafone and CK Hutchison has already faced criticism on competition grounds as it will cut the number of mobile telephone providers in the UK from four to three and bring with it likely increased costs for customers.

Efforts by CK Hutchison to previously acquire the mobile phone provider O2 were blocked by the EU Commission in 2016, citing the merger would lead UK customers to paying higher prices and having less choice.

Now the UK is outside of the European Union, CK Hutchison is hoping that this proposed merger can bypass previous antitrust concerns. But even if CK Hutchison and Vodafone can satisfy regulators’ competition concerns, there is a strong argument for this takeover to trigger the National Security and Investment Act and be reviewed on security grounds.

China’s introduction of the National Security Law in Hong Kong has not just seen the targeting of pro-democracy activists, lawmakers, and journalists, but has drastically reshaped the environment in which businesses now operate in the city.

Long gone are the days where local Hong Kong tycoons would vie behind the scenes to pick the next Chief Executive, replaced instead with new requirements under the draconian law to share data and information at the threat of fines, asset seizures, and imprisonment.

While Hong Kong businesses would have previously walked a cautious tightrope between the interests of Beijing and the international financial world, now a number of them stand accused of actively fuelling Russia’s war machine and complicity in sanctions busting.

One only needs to look at the behaviour of Western headquartered banks like HSBC that have frozen the bank accounts of pro-democracy parties in Hong Kong and blocked millions of pounds of pension savings from leaving the city in an attempt to accommodate Chinese officials to understand the levers of influence at play.

For businesses headquartered in Hong Kong, run by Chinese or Hong Kong nationals with a significant portion of their investments in mainland China, the risks of economic coercion from the PRC to do their bidding are even higher.

Recent developments in mainland China under Xi Jinping, particularly the passing of strict data laws, a national intelligence law that legally requires Chinese companies to work hand in glove with the state, and the expansion of espionage laws to restrict foreign companies access to economic data and surveys, paint a grim roadmap of the likely direction of Beijing’s crackdown in Hong Kong.

Lawyers who specialise in data protection will point to the UK’s Data Protection Act (2018) and implementation of the General Data Protection Regulation as a bulwark against cross-border data transfers between Three and its parent company CK Hutchison, which would otherwise require an international transfer agreement between the parties.

Given the current debate over TikTok’s transfer of UK user data to China, when it comes to CK Hutchison this requires a level of trust that they will continue to comply with UK data laws and are able to withstand future coercion from political masters in Beijing.

Whether it is the introduction of pending Article 23 domestic security legislation or a future expansion of the PRC’s national intelligence law to Hong Kong, it is only a matter of time before Hong Kong businesses will be legally required to provide data and close cooperation to the Chinese state.  

For the UK, having the prospect of half of its largest telecommunications provider controlled by a proxy of the Chinese Communist Party would create an unprecedented national security risk, similar to allowing Huawei to dominate the West’s 5G network.

This is why the special treatment that investment from Hong Kong has long been afforded is likely to come to an end, and why in the case of the proposed merger between Three and Vodafone there is a strong case for a review on national security grounds.

Sam Goodman, Hong Kong Watch’s Director of Policy and Advocacy