The decision by the National People’s Congress (“NPC”) of China to bar two “localist” representatives from Hong Kong’s Legislative Council (“LegCo”) and the likely future introduction of national security legislation are sure to heighten political tensions. The moves are seen as a challenge to Hong Kong’s autonomy and the rule of law, posing potential longer term risks to business in the Special Administrative Region (“SAR”).

Recent Political Developments

Political tensions in Hong Kong have mounted since elections in September for the Legislative Council (“LegCo”), the first such polls after the Occupy Central protest movement challenged the government in late 2014.

The polls for Hong Kong’s legislature on 4 September were tense, not least as the authorities disqualified six advocates of Hong Kong’s independence from running. Even so, the results saw the pro-establishment group, led by the Democratic Alliance for the Betterment of Hong Kong (“DAB”), win 40 seats, the pan-Democrat camp secure 24 seats, and new localist groups take six seats.

Problems with Oaths of Office

The elections resolved no divisions, though. Rather, a much more acrid atmosphere emerged after two of the localists, Sixtus Baggio Leung and Yau Wai-ching, in October refused to take the standard oath of office, but instead voiced profanities and held banners proclaiming that Hong Kong is not China and in doing so incurred the wrath of the central government and many Hong Kong locals.

The president of the LegCo accordingly ordered their removal, and the Hong Kong government requested a judicial review of a subsequent decision to let them swear their oaths again. Before the courts could rule, though, the Standing Committee of China’s National People’s Congress (“NPC”) on 7 November found that the two localists could not take the oath, exercising a power afforded by Article 104 of the Basic Law, Hong Kong’s mini-constitution.

The Chief Executive of Hong Kong, Leung Chun-ying, then announced that he would move forward with national security legislation in line with Article 23 of the Basic Law, a piece of legislation shelved since 2003, when it provoked massive protests from Hong Kong’s people.

What has changed?

The government’s request for a judicial review had already prompted heated discussion about the separation of powers in Hong Kong. Now, the NPC’s decision and a clear move towards national security legislation will ensure that debate will focus on the bigger question of the broader future of the One Country, Two Systems regime under which Hong Kong enjoys considerable autonomy.

This raising of the stakes has heightened the threat of further political turbulence. Beijing has little desire to compromise, epitomised in a refusal to alter electoral reforms, the capture of some booksellers, and official rhetoric branding opponents as “terrorists”, notwithstanding differences of opinion within the Chinese Communist Party.

Nor is the opposition becoming more temperate. Many localists will react angrily to the removal of their representatives; indeed, a protest on 6 November turned violent. The prospect of further confrontation as the government moves forward with national security legislation and ahead of the March 2017 Chief Executive election is real.

Implications for International Business

The international business community, which has come to rely on Hong Kong’s stable political environment and the rule of law, now faces a number of potential risks.

One challenge relates to Hong Kong’s institutions. The LegCo is at an impasse, unable to tackle even basic work-a-day issues. Securing funds is hard, which may encourage the Chief Executive to circumvent the chamber or to scale back his ambitions. A real concern is thus that related government work slows or even halts, which could aggravate the social tensions that underpinned Occupy Central and that may worsen if the economy slows.

Another risk relates to the rule of law. The localist political challenge has demonstrated the weakness of the local Hong Kong government. Already lethargic officials caught between demands from Beijing and the Hong Kong people routinely fail to act. Partly in response, Beijing has increasingly turned to the Central Government Liaison Office, which has gained sway at the expense of the formal Hong Kong government. National security legislation will only add to its clout.

The Liaison Office has nebulous constitutional standing. Questions hover over whether its decisions are open to judicial review. Moreover, its lack of transparency offers opportunities for China’s state owned enterprises, special interest groups, including the Heung Yee Kuk or Rural Affairs Office, to champion their interests in behind-the-scenes meetings.

A third challenge is more tangible. Protests may break out, some of which might degenerate into riots as in Mong Kok in February 2016, given radical groups’ penchant for confrontation, the poisonous culture of protest, and Beijing’s tough stance. A spate of civil disorder could pose risks to certain business, impeding access, damaging property, and perhaps even harming employees, even if the immediate threat is manageable.

Conclusion

The decision by the National People’s Congress to intervene in Hong Kong politics and the desire of the Chief Executive to move ahead with national security legislation raises the risk to business, by weakening local Hong Kong government, undermining the rule of law and adding to the risk of further protests or riots disrupting commercial activity.

International businesses need to respond to these risks by carrying out:

• An assessment of their exposure to Hong Kong government stasis, considering matters such as a reliance on government payments for big projects, approvals for licenses, legislative change or broader administrative needs.
• An examination of the intensity of links of the company, or any prospective partner, with the Central Government Liaison Office, on top of an understanding of its ties to Hong Kong’s authorities, where relevant.
• An assessment of the integrity of communications and business security in the context of the prospective introduction of national security legislation.
• An assessment of the future reliability of the local court system in any cases against a Chinese state-owned enterprise or an individual with strong links to mainland China’s government, taking into account the nature and length of any contract or investment in question.
• A re-examination of plans drawn up during Occupy Central, which sought to ensure the protection of employees and company property in the event of protests or riots. These plans should include measures how to assist employees who find themselves affected by pepper spray or CS smoke.

SVA is in a strong position to help investors understand the nature of risks related to the current situation in Hong Kong, and more broadly of doing business in China and Asia as a whole. Please do not hesitate to contact us at the numbers below or via email to [email protected].