SVA Update Number 19 – Hong Kong – PRC – Threat Assessment – 8 December 2020

The continuing crackdown on the protest movement has resulted in a return to stability in Hong Kong. However, a government misstep or an escalation in the geopolitical situation may yet reignite tensions – and a recent petrol bomb attack highlighted how radical elements could still resort to violence. As such, businesses should not relax their vigilance.

On the back foot

The ongoing crackdown on protesters has materially damaged opposition capacity. The radical demonstrators have largely been paralysed, whilst the wider opposition movement is on the back foot, aided in part by measures aimed at stemming the spread of COVID-19.

Demonstrators are going to jail in significant numbers. On 3 December 2020, opposition activist Joshua Wong Chi-fung started a 13 month custodial sentence, while Next Media owner Jimmy Lai Chee-ying was refused bail. Other, less prominent protesters also face prison, including several arrested on 7 December 2020 under the National Security Law.

A new political climate

The political balance has shifted. 15 pan-Democratic lawmakers resigned on 11 November 2020 from the Legislative Council (“LegCo”), in response to a resolution from the National People’s Congress (“NPC”) removing four of their colleagues. Now, pro-government legislators can move ahead, unhindered by opposition delays.

This lack of opposition poses its own risks, though, of the now completely unrestricted local government again inadvertently triggering protests via ill-considered policy decisions. In this context, Hong Kong’s police will need to display magnanimity in dealing with any new protests or risk a further round of unrest.

A further credible risk is that a small number of frustrated protestors resort to violence. Indeed, a petrol bomb attack on the Hong Kong Police Sports and Recreation Club in Prince Edward on 1 December 2020 showed clearly that a small group of radical dissidents is operational, capable of violence, and could yet engage in further attacks.

Integration into the Greater Bay Region

The ailing economy presents its own challenges. Unemployment is at a 15 year high of 4.8% (hiding high levels of underemployment), GDP fell by 3.4% in the third quarter of 2020, and the government projects a fiscal shortfall of about 6% of GDP.

In response, Chief Executive Carrie Lam Cheng Yuet-ngor has made clear that she will pursue closer integration into the Greater Bay region – not just as a means to shore up growth, but also in line with Beijing’s broader plans aimed at ensuring Hong Kong’s loyalty.

Such Integration will likely translate into tighter coordination of Hong Kong policy with the mainland government’s plans, such as efforts to establish a “dual circulation” system of separate internal and external markets.

Quite how this process will play out is not yet clear, but Hong Kong could evolve into a financial “decompression chamber”, tying the external system, through the city’s freely traded currency and open capital account, to a more constrained (and autarkic) domestic market. Either way, international business with a presence in Hong Kong will have to adapt.

The judiciary under strain

Such integration will further test the judicial system, which is already under great pressure. Mainland officials have recently criticised the judiciary’s reliance on foreign traditions, while dissidents are aggrieved at prison terms imposed on rioters, and at a perceived vagueness in the application of national security rules. Bomb threats have been made to a magistrate hearing national security cases.

The UK has also cast doubt on whether British judges will be able to serve in Hong Kong, which could potentially end a longstanding tradition. For now, the judiciary retains its autonomy, but businesses should not take the status quo for granted.

Heightened regional tensions

Looming in the backdrop are rising geopolitical tensions, driven by Chinese frictions with states such as the US, UK, Australia, Canada, India, Vietnam, and Japan.

In particular, the outgoing Trump administration on 7 December 2020 expanded financial sanctions to include members of the National People’s Congress, added China National Offshore Oil Corporation (“CNOOC”) to a blacklist, and adopted a new Holding Foreign Companies Accountable Act, which will compel US-listed companies to declare their independence of foreign governments.

Much will now rest on the stance of the new Biden administration. At present, the incoming administration shows little desire to roll back measures. Rather, President-elect Biden seems sure to work closely with regional powers, such as Australia, Japan, Taiwan and India, in coordinating a response towards China. Such collaboration, though, especially that with Taipei, will only inflame feelings in Beijing.

Tensions thus seem liable to rise, resulting perhaps in new sanctions that affect Hong Kong, targeting a major financial institution, or seeking to impact the currency peg. Washington could even take more assertive action, in the event of an incident in the Taiwan Straits, or in the South China Sea. Any such spike in tensions, though, will have serious implications for the business climate.

Implications for business

All told, the continuing crackdown has helped Hong Kong return to stability, but at a price of tying the city more tightly into the mainland political and economic system.

Looking forward, any clumsy misstep by an unopposed Hong Kong government, or a spike in broader geopolitical tensions, could pose new threats to businesses operating in Hong Kong.

Businesses should take account of these changes, and adapt to their accelerating pace.

SVA recommend the following key steps:

Carrying out an independent, external analysis to assess political exposure, in terms of Hong Kong and, more broadly, in terms of regional tensions.

  • Considering the possibility of violent actions by small, but radical protest elements and preparing contingency plans.
  • Re-examining internal processes, so as to amend operating procedures in Hong Kong to match those in mainland China, and to deploy personnel accordingly.
  • Re-examining supervision and oversight mechanisms, as well as recruitment policies, so as to place appropriate emphasis on relevant linguistic and cultural capabilities, in addition to any requisite skill set.
  • Assessing how the sway of Chinese businesses will rise in local dispute settlement, and factoring any such increase in weight into commercial decisions.
  • Responding to irksome and expanding compliance obligations, especially in the international banking space. Carefully gauged responses may require the establishment of new legal structures in the light of international sanctions.
  • Using external resources capable of monitoring Chinese and US policy, and ensuring that business activities take account of policy goals – or at least do not contravene changing policy provisions.
  • Contingency planning for further deterioration in Sino-American bilateral ties, and an associated rise in tensions. Boards of Directors should consider how sudden economic decoupling might affect business.

Contingency planning for regional crisis, with specific attention to vulnerability to interruption of supplies of goods, or spikes in financing or insurance costs, in event of a rise in tensions, or even direct conflict, in the South China Sea or Taiwan Strait.

SVA are specialists in consulting and provision of services in relation to operational security, planning and political threat analysis.

We stand ready to assist; please contact us for an initial consultation.

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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 local and senior expertise drawn from Intelligence, Operations and research functions of the former Royal Hong Kong Police Force.