A barrage of measures aimed at China and Hong Kong by the US government during “China week” in mid-September 2024 will likely result in a steep rise in Sino-American tensions.

However, most “plain vanilla” businesses operating in the Greater China region should not panic, despite alarmist headlines, as the measures mostly focus on rarified areas such as semi-conductors or biotechnology, or on specific businesses.

Even so, boards do need to respond quickly and effectively, so as to alleviate risks, and protect company interests – and SVA can advise on how to do so.

“China Week”

The US government and legislature adopted a series of measures during “China Week”, starting on 9 September 2024, which seem calculated to have a chilling effect on business in China.

Of perhaps most significance was a formal statement by Deputy Secretary of state Kurt M Campbell, which accused Beijing of providing military support to Russia in its conflict with Ukraine.

This direct assertion departed from a hitherto delicate dance around this issue, and so highlighted the depth of hostility towards China now in place in the US. The comments also suggested that further financial sanctions or other trade restrictions will follow.

A wide range of other measures were also touted, some immediate, some pending. For instance, the US Treasury has expanded powers held by the Committee on Foreign Investment in the US (“CFIUS”) over foreign purchases of land – a measure aimed at stopping Chinese investment close to sensitive locations in the US.

The Countering CCP Drones Act is aimed at excluding Chinese-made drones, such as those made by Shenzhen DJI Innovations (“DJI”) from use in US infrastructure, and another law will limit funding from the Department of Homeland Security to US universities that host Confucius Institutes, cultural facilities funded by the Chinese government. The Biosecure Act will also limit US companies’ dealings with Chinese biotechnology firms, such as WuXi Biologics, a company said to have military links.

The US government is also maintaining pressure on China’s high-technology industries. The Dutch government, under American pressure, may not renew licences required for semi-conductor machine tool maker ASML to provide services in China. The lapsing of maintenance contracts may mean that ASML machines become unusable in the coming months, so crimping Chinese semi-conductor manufacture.

Hong Kong

Some measures have targeted Hong Kong, both because of the political changes since 2019, and also because the city remains China’s pre-eminent international financial centre.

Four US departments issued a Hong Kong Business Advisory on 6 September 2024, highlighting “legal risks” in the city, and drawing attention to the passage of the 2020 National Security Law (“NSL”) and Article 23 security legislation in March 2024. The advisory warned that US or other businesses could face prosecution by the local authorities for routine business operations.

The advisory also warned that companies in Hong Kong need to comply with US sanctions, or face a regulatory response – a reminder coming amidst reports of the use of Hong Kong companies or financial institutions as a means to circumvent sanctions on the shipping or sale of oil from, or semi-conductors to, Russia. Again, the assertion promises new sanctions.

Hong Kong’s “diplomatic” apparatus is also under pressure. The passage during China Week of the Hong Kong Economic and Trade Office Certification Act could lead to the closure of representative offices in Washington DC, New York and San Franciso; a prominent espionage case involving the Hong Kong Economic and Trade Office in London has only bolstered support for this law.

China’s response

Beijing’s response has thus far been restrained, although its anger is clear.

The state media has condemned “anti-China McCarthyism”, referring to the anti-Communist actions of the 1950s, and spoken of racism, and some diplomats have criticized US “manipulation” of Hong Kong issues.

How China will respond is not yet clear – but a response is likely. Of course, any reaction raises the risk of escalation that further damages the business environment, meaning that companies will need to monitor developments closely.

The implications

In geopolitical terms, these developments damage a shaky détente that has hitherto arrested the decline in Sino-American relations.

After all, that arrangement was already frail, given ill-tempered confrontations in the South China Sea that threaten conflict between China and the Philippines, and frequent deployments of Chinese military aircraft and shipping around Taiwan.

The uncertainties related to the US elections only add to the risk. While a consensus on facing China down has taken hold in the US, administrative changes in the coming months will raise questions as to who will respond should tensions ignite into a crisis.

Risks to business

Companies operating in China and Hong Kong thus face a buffeting in the coming months.

New restrictions on trade could disrupt supply chains and worsen payment risks. Of particular concern would be the discovery that a partner, or a “sub-tier” supplier, has links deemed by one or another government as inappropriate; such a revelation could result in “naming and shaming”, and probably regulatory action.

Even so, quite how severe the impact of these measures will be is not yet clear. After all, China remains the second largest economy in the world, and its producers are integral to many supply chains. Most of these measures target only the “commanding heights” of the economy, such as semi-conductors or electric vehicles, not more mundane, but arguably just-as-important industries.

In addition, not all companies are reducing investment into China. Indeed, Germany’s Bundesbank published data in August 2024 suggesting that USD7.3 billion in German money was invested in the PRC in the first half of 2024, up from USD6.5 billion through all of 2023.

And with regard to Hong Kong, statements about legal risk ignore the reality that such changes were “baked in” in 2020, long before the adoption of the local Article 23 legislation in March 2024.

These changes, then, simply reinforce Hong Kong’s turning away from a reliance on western business towards integration into the Greater Bay area, and towards supporting companies from mainland China, Southeast Asia, India, the Middle East and Russia – some of which are “agnostic” with regard to US sanctions, and some of which wish to circumvent them.

What can foreign companies do to mitigate risk?

These latest measures are likely to result in a further deterioration in Sino-American ties, then, but there is no need for businesses to panic, especially if the company operates in a non-controversial sector.

Even so, to pretend that nothing is going to happen would be foolhardy. The complexities of doing business across the Greater China region are rising, and risks could worsen intensely, and at short notice.

SVA recommends companies should work with SVA to take measures to alleviate these risks by:

• Companies should carry out independent strategic appraisals, so as to gain a firm understanding of the threats and vulnerabilities in relation to their sector and business. Such assessments should consider geopolitical risks, alongside commercial concerns, and should ask what structural or operational changes to make in response. Forewarned is forearmed, after all.

• Companies may consider the severance of operations in Hong Kong and China from global structures, or other forms of “siloing”, with attention to corporate vehicles, finance, treasury, IT systems, and data management. Separation could protect group interests as the paths of different jurisdictions diverge, and would mitigate against the “weaponisation” of regulation.

• Continued adherence to robust due diligence standards is as important as ever. Boards should continue to require background investigations, and ensure that oversight is in the hands of a “neutral” party – and not under the control of a local team. Such measures should take account of the differences in jurisdiction, and are especially important as access to information becomes harder to gather, and as companies restructure their interests.

• A new and closer examination of supply chains or partnerships would help in identifying footprints that may render a business vulnerable. Initial considerations include the inclusion of components sourced from companies sanctioned by the US, or even from business partners of those companies, the exposure of key partners in mainland China, and how data or other laws may affect operations. Such appraisals should stretch to cover sudden loss of access to shipping routes, the closure of key ports, and an inability to source crucial components.

• Analysing and auditing the structure of investments and operations through the lens of (geo)political risk is crucial, going forward, so as to forestall threats. Any assessments should take place at a senior level, and on a group-wide basis, as needed, and not fall victim to matrix management structures. Such analysis is as necessary for departures from markets, as for new investments, and should include appraisals of alternative investment destinations.

• Monitoring developments for further deterioration is necessary, so as to ensure compliance with all relevant laws, and to protect a business’ interests and personnel. Such monitoring should be closely integrated into broader risk systems accessible to senior executives, and should be integrated into crisis response mechanisms.

• Companies should assess potential risks arising from sanctions issues closely, and how they may worsen in the coming months. For instance, boards might consider the impact on their businesses of US sanctioning of a major Chinese bank, or the ejection of Chinese financial businesses from the SWIFT system. A key point is that reliance on a long-practised “list-based” approach to handling sanctions is unlikely to offer protection in such circumstances. Such appraisals should also take into account how key parties might respond.

• Reassessing reputational risks, so as to take account of the changing temper in the US, would be sensible. Assessing the perceived “nationality” of a business, or its subsidiaries, is advisable. Corporate restructuring to distance a business from a particular state may be wise, as may be partnering with local or “neutral” entities. Companies might wish to examine whether partnership with certain firms in sensitive sectors is even worth the risk, if alternatives are available.

• Examining a counterparty’s financial position or other risks would allow for dexterity in the event of payment issues or collapse. These measures should take into account not only the direct impact of non-payment on the business, in terms of financial loss, but also how a major provider’s collapse might affect the broader business ecosystem.

• A review of regulatory risks is important, and should include examining vulnerabilities in the event of the “weaponisation” of supervision and enforcement actions. Executives must understand that inadvertent shortfalls could result in investigation or prosecution. Regulatory approvals may be of particular consideration when selling out of an investment.

• Public relations strategies should be attentive to the risks that a single clumsy statement could seriously damage a business’ standing. Geopolitical tensions can also lead to the deliberate distortion of narrative, and result in a company being “dragged into” a row, fairly or otherwise.

• Boards should ensure that staff understand the nature of the changes under way, and their impact on operations. The establishment of new training schemes would help staff understand the risks in question, and the need to take such political issues into account when making seemingly workaday. Such training will need “refreshing” to keep up with developments.

• Boards should prepare operations for a possibly sudden and steep rise in tensions between the US and China, particularly in the event of a Taiwan Straits or South China Sea crisis. Companies should identify key challenges that might arise in such a context, such as boycotts, condemnation in the media, regulatory action or protests aimed at a facility, and even harm to plant and personnel, and adjust security mechanisms accordingly.

• Ultimately, acting decisively is crucial. Companies should identify concerns, undertake an appraisal of the risks, report in full, and then implement essential mitigating measures. Such plans should seek to put in measures that provide additional resilience even in the event of “unknown unknowns” coming to pass.

SVA

SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world.

SVA has three core lines of business, which are: Business Intelligence and Political Risk; Corporate Investigations; and Special Risk.

SVA also has a dedicated crisis management team which, for our retained clients, stands ready to assist companies during crisis situations.

SVA is based in Hong Kong, Singapore, and London and operates globally.