A sharp decline in the scale and impact of protests in Hong Kong since the adoption of the national security law heralds greater stability for business – if at a price. After all, political divisions remain intense, as differences of opinion over large scale efforts to test for COVID-19 show, and Hong Kong’s integration into the mainland continues apace. Businesses must now adapt to the changing circumstances.

A return to stability

Stability is returning to Hong Kong. The numbers at, and intensity of, protests has fallen, in part owing to a government crackdown, and in part owing to the threat of infection by COVID-19.

Several hundred people attended a commemoration in Prince Edward Station on 30 August 2020, well down on the thousands at earlier rallies; and a protest against the deferral of elections on Sunday 6 September 2020 saw hundreds take to the streets, far fewer than the intended 50,000.

Even so, political divisions remain stark. The public response to the government’s plan for mass testing for COVID-19 has highlighted schisms. Pro-government supporters willingly line up, while their opponents claim that the tests are a means to harvest DNA details. Such tensions will not dissipate any time soon.

Actions by the authorities

The adoption of the National Security Law on 28 May 2020 has bolstered the authorities’ powers, enacting new offences, including subversion, establishing a new special branch in the police, and formalising the deployment of mainland security personnel to Hong Kong. In doing so, the law has silenced, or deterred, many government opponents.

The Hong Kong Police have made arrests under the new law, and have continued others under established legislation. Perhaps the most prominent arrest was the detention of media tycoon Jimmy Lai Chee-ying on 10 August 2020, in a much-publicised raid on the Apple Daily newspaper offices.

A steady drumbeat of less spectacular seizures have also taken place, including the apprehension of some wanted protesters and others in breach of bail fleeing by boat to Taiwan, and some 289 people arrested after protests on 6 September 2020 in Mong Kok and Yau Ma Tei.

The overall result is a return to comparative stability. Indeed, the Commissioner of Police, Chris Tang Ping-keung, on 31 August 2020 himself noted that the national security law has had its intended effect, saying that protest numbers have fallen markedly, and that many demonstrators have sought to flee.

Now, the authorities are seeking to win back public opinion. Police have stepped up their presence, and the government has launched a campaign to raise awareness of the risks of terrorist attack. They have some way to go, though.

Police have sought to play down the 21 July 2019 Yuen Long incident – a cornerstone of the protest movement’s story. These comments prompted derision in protest quarters, but are welcome in the pro-government camp.

Political changes

This stability comes at a price. Political shifts have accompanied the new law.

As highlighted by demonstrators, the Hong Kong government on 31 July 2020 postponed elections for the Legislative Council, scheduled originally for 5 September 2020. This deferral has raised deep questions about Hong Kong’s political arrangements, and has forced opposition legislators to consider whether to serve in a legislature some consider of dubious legitimacy.

Pressure is also growing on the judiciary, according to reports in August 2020. Indeed, in early September, Chief Executive Carrie Lam denied that the doctrine of the separation of powers operates in Hong Kong. Her comments prompted criticism from the Hong Kong Bar Association. For now, though, the judicial system retains its autonomy.

All told, a new constitutional settlement within the “One Country, Two Systems” formula is taking shape, with Central Government Liaison Office acting as would a provincial Chinese Communist Party (“CCP”) secretary, and the Hong Kong Chief Executive looking akin to the mayor of Hong Kong.

The result, in time, will be Hong Kong’s integration into mainland China’s political and administrative regime.

Foreign condemnation

A number of foreign governments have decried the changes. Most importantly, Washington has: condemned the law; sanctioned eleven officials; suspended the transfer of criminal suspects; and revoked Hong Kong’s separate trading privileges, and its reciprocal tax arrangements for shipping.

Other states have taken comparable, if much weaker, actions. The United Kingdom, France, Germany, and other European states have all suspended extradition arrangements – a move that might protect political exiles, but will inadvertently assist common criminals and fraudsters.

The problem is that such actions have turned Hong Kong into an arena for proxy contest between the US and China, leaving the city hostage to external tensions, such as those over trade frictions, the South China Sea, and Taiwan – whose overt support for Hong Kong’s protesters has angered Beijing.

Needless to say, such developments promise scant benefit to Hong Kong, not least as regional tensions are at their highest point in years, ahead of US elections.

The impact on business

Businesses must quickly adapt to this new situation. On the one hand, a return of stability in Hong Kong will benefit commerce, but, on the other, businesses must be mindful that political differences remain intense, and that a studied neutrality will be increasingly hard to maintain, particularly for prominent global companies.

And worse is to come. The Hong Kong Autonomy Act obliges the US government to impose a new round of financial sanctions in mid-October. Financial institutions in Hong Kong may struggle to reconcile the contradictions inherent in US sanctions and Chinese responses, especially as compliance could breach Hong Kong’s national security law.

The sanctioning of a major Chinese bank is a particular risk, which could threaten financial or currency instability in Hong Kong, or elsewhere. For now, though, Washington seems likely to keep some powder in reserve, meaning that the targets in October should not prove structural – subject, of course, to the vagaries of the American presidential elections.

Reasons to be cheerful

The situation is challenging, for sure, but does not represent the death of Hong Kong. After all, the expertise and skills of Hong Kong’s people, developed over decades, have not vanished. Rather, a shift is under way, from Hong Kong’s longstanding role as a window into China, into a platform from which Chinese businesses, such as Alibaba, can tap the markets, or manage external interests.

This shift was already discernible in the preponderance of mainland business. Mainland companies accounted for 65% of listed shares on the Hong Kong Stock Exchange, as of May 2020, while Chinese banks held more assets in 2019 (USD1.1 trillion) than those from any other region. Chinese investment accounted for 39% of real estate transactions in the year to 1 September 2020, compared to 19% in 2019.

Economic integration into the Greater Bay region will surely accelerate now. Of course, this transition may challenge some businesses, particularly those advising western businesses on how to handle investments on the mainland. Others, though, can benefit, perhaps by selling services to Chinese companies, if they respond nimbly.

What should businesses do?

Businesses must carefully assess the new environment in Hong Kong, by:

• Examining a business’ political exposure, to establish whether it might become a target of political pressure, sanctions or attacks. Businesses must pay particular attention to social media and other publicity, so as to avoid any clumsy mistakes by staff with insufficient understanding of the new political situation.
• Examining political risks and potentially reduced operational freedoms, and by carefully altering standard operating procedures, so as to match those in the PRC.
• Considering the possibility of violent responses by small but radical protest elements, or a potential bomb threat or attack. The prospect of such attacks is now diminishing, but as the COVID-19 restrictions are lifted the chance of a resurgence cannot be completely eliminated.
• Responding to compliance obligations, with special attention to financial sanctions, considering the impact of further measures on payment systems, and banking operations. Responses may require the establishment of new legal structures, well ahead of any change.
• Re-examining recruitment policies, so as to place an increased emphasis on linguistic and cultural capabilities, in addition to any requisite skill set. Such changes may also require alterations to supervision and oversight mechanisms.
• Planning for a further deterioration in Sino-American bilateral ties. Consider whether a business is operating in a sensitive sector, and how decoupling could affect that business.
• Establishing sound communications mechanisms, with redundancy, so as to issue clear warnings and advice to staff, and to maintain lines of communications with other offices.
• Preparing for crises, with attention to the vulnerability of operations in event of a rise in tensions, or even direct conflict, in the South China Sea or Taiwan Straits.

SVA has extensive experience in providing practical support in relation to operational security, planning and threat analysis.

Please do not hesitate to contact us, should you need assistance.

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 a dedicated crisis management team which, for our retained clients, stands ready to assist companies during crisis situations. Retained clients pay an annual fee for a 24-hour response capability.

SVA is based in Hong Kong and is the only firm with the local and senior expertise drawn from Intelligence, Operations and research functions of the former Royal Hong Kong Police Force.