Beijing’s increasing interference in Hong Kong is hurting confidence among international businesses in the territory, according to a report from the US State Department.

Moves to align the legal systems of Hong Kong and China, expected to be approved in the near future by Hong Kong’s legislature, mean Chinese courts will soon be able to seek the extradition of people on criminal charges from the semi-autonomous territory and seize their assets if a court in China rules that they owe money.

“The tempo of mainland central government intervention in Hong Kong affairs — and actions by the Hong Kong government consistent with mainland direction — increased, accelerating negative trends seen in previous periods,” the Hong Kong Policy Act Report 2019, which was released on Thursday, said.

The report cited the Hong Kong government’s de facto expulsion of Financial Times journalist Victor Mallet last year, the ban of the pro-independence Hong Kong National party and the proposed China national anthem law, as examples of mainland pressure resulting in “new constraints on Hong Kong political space”.

The document’s publication comes as concern grows in legal and business circles that the proposed extradition law and plan to uphold judgments made in China on “civil and commercial matters”, could lead to miscarriages of justice and considerable risk for business people in Hong Kong.

“There is a pressing need for better connectivity,” said Rico Chan, a partner at Baker McKenzie, explaining that the large number of cross-border businesses and transactions was leading to growing numbers of disputes. “It’s the matter of whether closer means too close.”

The law on civil and commercial cases would apply to anyone resident in Hong Kong or China or even anyone who has maintained “a representative office, branch, office, place of business [in Hong Kong or China] . . . and that action rose out of the activities of that establishment”, according to the agreement signed in January that has been presented to the territory’s Legislative Council.

Dennis Kwok, a Hong Kong Legislative Council member, said while lawyers generally welcomed the idea of closer ties with China in civil and commercial cases, there were fears over the quality of the mainland Chinese legal system and over the independence of its judiciary.

Lawyers also said cases that would remain civil disputes in many jurisdictions seemed to end up leading to criminal charges in China.

Steve Dickinson, a US lawyer who assists foreign companies doing business in China, said civil courts in China had a reputation for being weak in enforcing orders, which meant lenders were often keen to pursue a criminal conviction instead.

In the US, UK or Hong Kong, he explained, businesses tend to pursue civil cases because they want to recoup money for themselves, rather than ask authorities to press charges. “But in China, the lenders are the government — it makes sense for them.”

He added that it was common for debtors in China to be charged with financial fraud or lying about their income after failing to repay loans.

The annual report is submitted to the US Congress to justify the 1992 Hong Kong Policy Act, which allows Hong Kong to be treated as a non-sovereign entity distinct from China for trade and economic matters under US law.