The US has warned US companies operating in Hong Kong and signaled that Washington could take further action, says a lawyer specializing in compliance with international trade regulations.

Adam Smith, an associate at law firm Gibson, Dunn & Crutcher, said Friday’s financial and regulatory risk advice was “quite substantial” but it “is doing nothing right now regarding changing the rules”.

However, it suggests that from a political point of view, “the US could do a lot more,” he told CNBC on Monday to “Capital Connection”.

Friday’s nine-page advisory warned that US firms in Hong Kong face multiple risks posed by China’s national security law. Washington also announced sanctions against seven Chinese officials for violating Hong Kong’s autonomy.

Possible next steps

On what the US could do in response to Beijing’s crackdown on Hong Kong, Smith stressed that sanctions against organizations, corporations and institutions “would really change the nature of engagement and risk for parties in Hong Kong” that have so far failed to materialize .

Sanctions against individuals can be challenging for US firms in Hong Kong, but the “real difficulty” comes from restrictions on organizations with which companies often interact, he said.

People wearing face masks cross a street in the Wan Chai district of Hong Kong on February 16, 2021.

Zhang Wei | China Intelligence Service | Getty Images

Hong Kong’s attraction

For the time being, however, there are “too many opportunities” in Hong Kong for companies to leave the city.

“Hong Kong … still has an incredible amount of human capital that many companies still need,” he said.

Kurt Tong, a former US Consul General and head of mission in Hong Kong and Macau, said Hong Kong is still a good place to do business despite the risks.

“There’s a legal risk, there’s a reputational risk, there’s some level of operational risk – but I think those risks are measured,” he said.

“At the same time, (companies) need to keep the big picture in mind, which is that China is a huge and attractive economy to do business with. And Hong Kong is still in many ways … one of the best platforms to do business with, “he added.

The rhetoric was so tough on both sides, so a lot of face has to be preserved.

Kurt Tong

Partner, The Asia Group

Tong, a partner in consulting firm The Asia Group, said the rule of law in Hong Kong has deteriorated, but most companies are not convinced it has been completely wiped out.

“I think it will take more to drive companies out of Hong Kong than the changes so far,” he told CNBC’s Squawk Box Asia.

Biden Xi meeting?

As for the way forward, Tong said he expects US President Joe Biden and Chinese President Xi Jinping to meet in the fall and discuss each of their “red lines” that cannot be crossed.

In the meantime, he said, the “diplomatic tournament” will continue.

“The rhetoric has been so tough on both sides so there is a lot of face to be seen,” he added.

Trade talks between the two sides have stalled for the time being, and the US has no incentives to start negotiations because it does not believe such talks will be successful, Tong said.

“It’s a complex picture … the relationship between the US and China during the Biden Xi era,” said Tong. “We’re still in the … first scene of act one, how that’s going to play out in the coming year.”