The draft bill, introduced at the city's legislature on Friday, includes major offences such as treason and insurrection, which could be punished with life imprisonment.
The government has said it intends to pass the bill as soon as possible to plug legislative gaps left by an existing national security law imposed on Hong Kong by Beijing in 2020 after the finance hub saw massive pro-democracy protests.
Authorities also say it is their constitutional responsibility to enact homegrown national security legislation according to Hong Kong's Basic Law -- a mini-constitution governing the city since it was handed back to China from Britain in 1997.
But the city is entering "untested, uncharted waters" with the proposed law, said Kristian Odebjer, chairman of the Swedish Chamber of Commerce in Hong Kong, speaking to AFP before the draft bill was unveiled.
Its offences include treason, insurrection, espionage and theft of state secrets, sabotaging national security, and external interference.
But the definitions are "vague", said Odebjer, particularly for the theft of state secrets -- which, according to the draft bill, includes defence intelligence but also encompasses information about the city's economic, social and technological developments.
"This could have a negative impact on... activities that some of our members engage in like research and due diligence activities," Odebjer told AFP.
These activities "contribute to, or are necessary even, for a functioning financial centre and a market economy like Hong Kong", he said.
However, city leader John Lee, a Beijing-picked ex-security chief sanctioned by the United States, said the proposed national security law -- known as Article 23 -- would act as "an effective lock to prevent burglars".
It will exist alongside the Beijing-imposed national security law, which covers four major crimes: secession, subversion, terrorism and collusion with foreign forces.
AFP sought comments from members of the business and diplomatic communities during a one-month public consultation period.
In the draft bill introduced Friday, a "public interest" defence to the state secrets offence was added.
It means a person accused of such a crime could argue their action was in the "public interest" and outweighs the alleged threat to national security -- though the bill did not define "public interest".
- 'Red line' -
For an economist working for an international bank, the biggest risk "is that increasingly sometimes you don't really know where the red line is".
Banks, firms and investors regularly rely on research, economic data and due diligence reports which could fall under the purview of "state secrets".
The economist, who declined to be named for fear of repercussions, told AFP there could be a situation where a published analysis would affect investors' sentiment in Hong Kong.
"Will they (the authorities) come back to me?" he questioned. "Is (the report) a threat to so-called economic security?"
The Law Society of Hong Kong, a statutory body all solicitors must join, has recommended the government ensure that "legitimate commercial secrets... will not inadvertently fall within the ambit" of the state secrets offence.
It also provided a fictitious example of research done by a private company into "booster fuels" for vehicles, which later discovered it could be used in rockets and missiles.
"Should (the firm) continue to possess these secrets, knowing that unlawful possession of state secrets is an offence under the proposed ordinance?" the society asked.
- 'Worst' of all worlds -
A previous attempt in 2003 to introduce a national security law triggered massive pushback.
Half a million Hong Kongers protested against what they regarded as an erosion of the liberties Beijing promised Hong Kong would have for 50 years post-handover under the "one country, two systems" doctrine.
Today, four years since Beijing's national security law was enacted, much of the city's opposition bloc and democracy activists have been arrested, silenced or fled Hong Kong.
Britain has called on the government to reconsider the legislation, while the United States said the new law "risks compounding the 2020 National Security Law that has curtailed the rights and freedoms of people in Hong Kong".
"Basically they took the worst of mainland China's criminal law, they took the worst of post-9/11 English-speaking countries' anti-terrorism laws and they took the worst of colonial law," a diplomat told AFP, requesting anonymity due to the sensitivity of the matter.
He added that the decision for international firms to set up in Hong Kong was because of the "one country, two systems" doctrine, which allows the city to be governed under British common law instead of mainland China's opaque legal system.
"Now it seems that the border between the 'two systems' is becoming... smaller and smaller," the diplomat said.
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