A growing number of international firms in Asia are worried about using Hong Kong as a venue to resolve legal disputes arising from contracts, according to a Financial Times report.

Sources from 10 large law firms in Hong Kong, Tokyo and Singapore said their clients have asked about excluding Hong Kong from governing law and arbitration clauses over concerns that the city’s rule of law might suffer under China’s tightening grip, the Financial Times reported.

A governing law clause decides which country’s laws will apply to the parties entering into a contract, while an arbitration clause allows the parties to pick an arbitral center to resolve potential disputes.

The companies voicing concerns are mostly headquartered in the United States and Japan and have been conducting business in Hong Kong or setting up joint ventures with partners from China or other Asian countries.

Hong Kong’s Secretary for Justice Teresa Cheng has a background in international arbitration and is a member of the Chartered Institute of Arbitrators and the International Centre for Settlement of Investment Disputes.

Cheng had ambitions of growing Hong Kong’s reputation as an arbitration hub and to compete against Tokyo and Singapore, a lawyer specializing in governing law and arbitration clauses told Apple Daily.

Companies used to choose Hong Kong as an arbitration center because the city’s laws and institutions were seen as more reliable than those in China, the lawyer added.

Kevin Tsui, an economics professor at Clemson University, said that the decrease in confidence will have lasting effects on Hong Kong.

“Companies that wish to invest in mainland China used to believe they were protected by Hong Kong’s laws. Now they feel ‘one country, two systems’ no longer exists, so Hong Kong would lose its unique role and become just another city in the Greater Bay Area,” Tsui said.

Quoting a managing partner of a U.S. law firm in Hong Kong, the Financial Times reported that large private equity clients have been asking whether it was safe to leave Hong Kong as the seat of arbitration. Another legal source told the newspaper that the question had been asked by clients from multiple sectors.

Japanese companies are expressing similar concerns and are now considering Singapore as an alternative to Hong Kong, said Yoshimasa Furuta, a senior partner at Anderson Mori & Tomotsune, one of Japan’s Big Four law firms.

In a statement, the Department of Justice said that Hong Kong’s reputable dispute-resolution bodies, well-equipped arbitration facilities, multilingual talent and free market provide a solid foundation for the city to serve as an international hub for legal and dispute-resolution services.

“We will continue to promote Hong Kong’s advantages as a neutral, effective legal hub for fostering transactions and resolving disputes,” a spokesperson told Apple Daily.

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