Western governments should reduce trade with China so they are not vulnerable to bullying from Beijing, a new report citing the example of Hong Kong has warned.

Beijing has been helped to achieve its political ambitions in the city by a steady rise in investment from mainland China over the past two decades, finds the report by Hong Kong Watch, an advocacy organisation.

“The massive influx of red capital explains why Beijing failed to pass national security legislation in 2003 but succeeded in 2020,” said Johnny Patterson, policy director of Hong Kong Watch.

“State capitalism dictates that the Communist Party’s interests are the first priority for every business.”

Employees of Chinese firms in Hong Kong, for instance, were banned from participating in the pro-democracy protests that roiled the streets in 2019.

Thirty-five percent of Hong Kong media outlets also have a major mainland Chinese stake, which has allowed Beijing to “shape the media environment through censorship and editorial control,” according to the report.

Chinese firms were banned from taking advertisements out in Hong Kong media outlets that carried coverage deemed unfavourable by Beijing – a move that squeezed a business lifeline for news organisations.

One of the outlets targeted in this advertising boycott was Apple Daily, a Hong Kong tabloid owned by tycoon Jimmy Lai who was arrested and charged with vaguely-defined national security crimes in December.

Western policymakers and financial firms should direct foreign capital away from China, where such money could be complicit in human rights abuses, and enact legislation to allow for economic sanctions, recommends the report.

Governments could ensure that state pension funds do not invest in Chinese companies involved in human rights violations. Index providers should also consider removing such firms from major market indices, often used as benchmarks for investors, the report recommended.

The report highlighted that Chinese state-owned enterprises and private firms should both be of concern to Western governments given their “dependency on Beijing.”

“The [Chinese Communist Party] continues to control the capital market on the mainland meaning that ‘national champions’ flourish under the beneficent hand of the CC, while outsiders flounder,” according to the report.

“Elites foolish enough to challenge the status quo are liable to find themselves in court facing corruption charges.”

Private firms must toe the Communit Party’s line to succeed in China and are responsible for furthering state objectives – a flashpoint in the debate about Chinese telecoms firm Huawei, which the US, UK and other nations have banned from future mobile network infrastructure over security concerns.

“It is time to wake up. We need to be looking at where Western institutional investment is going and where China is targeting its investments,” said Mr Patterson. “Hong Kong is a canary in a coalmine.”

“If we allow another ten years of Beijing’s strategic investment of red capital across Africa and Europe, Latin America and Asia to take place unchallenged, we should not be surprised if – when inevitably there are geopolitical flashpoints – we see a rerun of Beijing domination of Hong Kong in other strategic geo-political battlegrounds or indeed on our own doorstep.”