Hong Kong has been hoping to cement the its status as Asia’s key financial hub for some time, including for private markets.

As recently as April, lawmakers wanting to attract private equity funds passed legislation to ensure locally managed vehicles are not subject to tax. The city might also consider taxing carried interest as a capital gain rather than income, bucking the global trend.

The effort now faces a headwind. Up to two million citizens took to the streets on Sunday to protest a proposed bill that would allow extradition to China. Days earlier, police deployed tear gas and rubber bullets against peaceful protestors blocking entry to a debate at the city’s legislative building.

The move came only half a decade after five Hong Kong booksellers, including British and Swedish nationals, were allegedly abducted and detained in the mainland.

Hong Kong’s chief executive, Carrie Lam, has since delayed the extradition bill amid calls for her resignation.

Private equity investors are keeping their eye on the situation. One senior executive at a Hong Kong-based buyout firm told Private Equity International on condition of anonymity that they had fielded numerous calls on the day of the violence from LPs concerned about how it might affect dealflow. Singapore was mooted as the obvious alternative should the situation deteriorate further.

Make no mistake: Hong Kong is already a private equity powerhouse. Firms managed $152 billion in Hong Kong as of mid-2018, around 16 percent of the total capital under management in Asia and second only to China in the region, financial secretary Paul Chan said in January. The city is a fundraising hub for Chinese managers seeking USD and global firms hoping to access Asian LP capital.

Hong Kong also enjoys a special relationship with the US under the Hong Kong Policy Act, which protects it from tariffs on Chinese goods, permits the city to buy sensitive technologies under US export controls and guarantees free exchange between the two currencies.

A US congressional commission said last month that amending the extradition laws could provide grounds for Washington to re-examine elements of its relationship with Hong Kong.

China has made no secret of its desire to assimilate Hong Kong and has a history of ignoring public opinion when it comes to policy making. Xi Jinping will also be reluctant to concede defeat while embroiled in a trade war with the US.

Hong Kong has often been described as the window into China. In future, the city must ensure that window can’t be mistaken for a mirror.

Write to the author: alex.l@peimedia.com