SVA Update Number 9 - Hong Kong Protests – Threat Assessment – 14 October 2019 - 1000hrs

SVA

Unrest in Hong Kong continues to pose significant and rising risk to business, despite falls in the numbers of protesters.  The situation remains “events-driven”, and could flare up as a number of key triggers approach.  Businesses must act to protect staff, premises and especially retail outlets, to ensure operational continuity, and to limit political risk arising from the identification of some firms being classified as anti-demonstrators or pro-establishment by extreme elements. 

The Protests

Rallies have continued across Hong Kong in recent weeks, with serious unrest over both the 1st of October holiday and the weekend of 5th and 6th October 2019 resulting in extensive vandalism of Mass Transit Rail (“MTR”) stations, attacks on businesses perceived to be mainland Chinese owned, on individuals, and with violence directed towards the police, in response to the implementation of an emergency law banning the use of face masks at rallies. Over the weekend of 13th and 14th October violence by small groups escalated and included the attempted murder of a Police Officer and arson attacks.

These, and other events have highlighted how the unrest has changed in nature.  Notably, demonstrator attendance has fallen, from many thousands to hundreds, perhaps owing to the intensification of the violence, denial of police permits to demonstrate and also to the early closure of the MTR, a de facto curfew.  The level of violence has markedly risen, perhaps as the demonstrators seek to maintain the movement’s visible momentum and as frustration as to their lack of progress grows.

Support for the protesters, their cause, and even for violence, is strong in some sectors of Hong Kong society, such as amongst some medical staff and other professionals, but may be waning on the broader front by workers who are now suffering inconvenience at the “coal face”. The violence and vandalism have however damaged the protests’ “legitimacy”.

The Government and Police

To date, the government shows little appetite for a political solution-preferring instead to sit tight, shielded by an increasingly pressurised and stressed Hong Kong Police Force.

Public perception of the complete absence of ministerial accountability for this situation - which was born out of a colossal administrative blunder and compounded by intransigence and incompetence - sit at the very heart of the matter.

Practical political steps that might alleviate tension include the resignation(s) of the Ministers most closely associated with the extradition bill fiasco as well as the introduction of a Judicial Commission of Enquiry into all of the events leading up to and following the crisis.  Whilst not a panacea this course of action might be sufficient to take much of the steam out of the movement and would serve to isolate the most radical elements, who could then be dealt with. The unfortunate fact is that the current Chief Executive is now so deeply unpopular that her long term presence is counter-productive to a lasting solution and thus is in neither Beijing nor Hong Kong’s best interests.

In the absence of a political solution, then, an escalating cycle of violence seems most likely, whereby increased demonstrator aggression elicits greater use of force by the Police and ever more aggressive attacks from protesters.  More worryingly, the volatile climate provides ample opportunity for “agent’s provocateur” of whatever stripe, to heighten tensions, or for the larger Triad Societies to intervene, either at their own behest or under the influence of other parties.  The Hong Kong and PRC Government will prevail, the only question being at what cost?

Mainland China’s Stance

Beijing has thus far acted with remarkable restraint.  The Central Government has signalled that it could intervene directly, and has taken actions to ensure that such an option is available, but shows no desire to do so.  Its reticence stems from awareness that doing so would materially damage Hong Kong’s future as a financial sector, with a freely traded currency, a key national interest for China. 

Beijing may hope that the withdrawal of the “evil law”, combined with the effect of enhanced security measures based on local emergency powers and by making use of local supporters, will re-establish stability in Hong Kong; its agencies might then act “under the blanket”, so as to ensure such instability does not reoccur.

Of course, this strategy has not succeeded to date, and rumours have emerged of a reshuffle at the Central Government Liaison Office in Hong Kong.  Any sudden shift in personnel may result in a new approach, meaning much will depend on the new appointments and the timing of such.

Possible “Triggers” for Action

Various events could trigger protests in the weeks ahead.  The re-opening of the Legislative Council (“Legco”) means that debates or the passage of legislation could draw crowds onto the streets to defer government bills or even an attempt to wreck the de facto parliament for a second time. A second invasion of Legco or a protracted closure of the Airport would probably be intolerable to Beijing and might invite a full scale crackdown.

Chief Executive Carrie Lam’s policy address on Wednesday 16th October 2019 could also prompt further unrest. Largely already leaked, the address seeks to alleviate the social ills that underpin people’s wider dissatisfaction, such as the cost of housing and economic inequality, but Carrie Lam is now so widely hated that her every public utterance provokes irrational anger, regardless of the content. 

The prosecutions of those arrested for rioting will also draw attention and create future friction and tensions.  Hitherto, the Department of Justice has proven ponderous in bringing people to trial, in part owing to incompetence, and in part owing to some officials’ reported lack of support for the current Secretary of Justice.  However, hearings will accelerate in coming weeks, meaning the protesters focus may change and that they may target the judiciary, particularly if offenders receive heavy sentences for violence, as seems likely. 

The District Council elections on Sunday 24th November 2019 are also looming.  These polls are the most democratic in Hong Kong, and will serve as a real test of public opinion, but the government may be forced to consider postponing them on security grounds.

Doing so, though, would damage perceptions of Hong Kong’s stability and rule of law.  Moreover, the pro-Beijing Democratic Alliance for the Betterment of Hong Kong (“DAB”) tends to do well in local polls, thanks to grass roots links and extensive funding, meaning that the government will want them to go ahead.  Violence during the polls is however likely.

The Risks to Business

The risks to business operating in Hong Kong are thus rising.  The most obvious concern is that the territory-wide unrest is not dissipating, rather it is escalating with smaller more violent groups.
As such, businesses need to be mindful of the safety of staff, and their families, the risk of damage to plant and property, damage to retail outlets, and the potential denial of access to business premises.  More broadly, the targeting of key transport infrastructure, such as Hong Kong International Airport and the MTR, would, if sustained, disrupt business operations. 

A further risk is that the Central or Hong Kong governments limit use of the internet or other communications, perhaps inadvertently, in an attempt to prevent protesters from organising through Telegram or other communication apps.  An abrupt internet outage, for instance, could have a major impact on many businesses operations and would damage Hong Kong’s reputation as an open society. 

More invidious from the business perspective is that various factions are demanding that businesses “demonstrate loyalty”, and now attribute political motives to commercial decisions or ill-considered statements.  Such actions can result in boycotts, as highlighted by the pillorying of the US National Basketball Association (“NBA”) after a mid-level executive made clear on Twitter their support for the protesters, attacks on premises, as with Maxim’s and Starbucks, and even action by state agencies.  The close monitoring of social media accounts is especially important in this context, as an unwary, or malicious employee (or even a competitor) can cause significant damage.

The divisive tone of international politics, with talk of a new Cold War, trade frictions, and reports that the US government wishes to limit Chinese companies’ access to American capital markets, only intensify the risks in this regard.

A major risk, then, relates to the possible passage of the Hong Kong Human Rights Act by the US Congress.  This law, if passed, could lead to the imposition of sanctions on senior Hong Kong officials, such as travel bans – hitherto, an almost unimaginable action. 

That act also heightens the prospect of the US removing Hong Kong’s special trading status afforded Hong Kong under separate legislation.  Any such action would have enormous consequences for Hong Kong’s financial sector.  For now, such an event seems unlikely, though. 

What to do

Businesses can negotiate this challenging environment, provided they plan carefully, act to mitigate risk, and monitor the rapidly changing environment.  A reliance on practices drawn up even a few years earlier is no longer tenable. 

Key actions include but are not limited to: