SVA Update Number 16 – Hong Kong Situation – National Security Legislation – 30 June 2020

The adoption on 30 June 2020 of a new national security law by the National People’s Congress (“NPC”) may result in protests, and violence, over the coming days, and will likely alter the commercial climate in the longer term.

Businesses should thus prepare for near term disruption and some street protests.

The National Security Law

On 30 June 2020, the standing committee of the NPC of the People’s Republic of China (“PRC”) imposed a national security law on Hong Kong, under Annex III of the Basic Law, Hong Kong’s mini-constitution.

Prior to the law’s passage, detail as to its content had been scant. The new law introduces measures aimed at preventing subversion, separatism, and collusion with foreign powers, aimed at stemming the unrest that has affected Hong Kong since mid-2019, and at shoring up Beijing’s control ahead of Legislative Council elections in September 2020.

The national security law will lead to institutional change. The central government will establish a National Security Office in Hong Kong, and will deploy mainland security personnel. The local authorities will constitute a new court, and the Hong Kong Police Force will staff a Specialist Branch, in support of the new machinery.

These measures should ensure greater stability, in due course, but will diminish Hong Kong’s freedoms and autonomy – accelerating a process that was already under way.

Likely Response

A degree of pushback is certain, from mainstream and fringe groups alike. The Bar Association has already highlighted concerns about the national security law’s application, and its impact on Hong Kong’s legal system. Other lobby groups will seek to defend Hong Kong’s hitherto open system.

How successful such efforts will be, though, is not clear. The law is sound in substance, and attempts to have local courts review decisions by central government bodies seem sure to fail. Moreover, the Hong Kong government shows ever less patience towards those seeking judicial reviews; one such campaigner faces bankruptcy proceedings.

Activist-sponsored union activity is also likely, with renewed calls for strikes and class boycotts by student bodies and trade lobbies, such as that amongst medical workers. However, votes on such strikes foundered in mid-June, for lack of participation, meaning that such action might simply peter out.

Of additional concern will be street protests, and perhaps unrest. Protesters will want to avoid arrest, though, and so a series of small, targeted, and possibly violent, rallies seems more likely than widespread disorder, in the days ahead. Even so, such an approach may in time lose momentum, as the threat of a heavy crackdown deters moderates from attending protests.

To be sure, the authorities will take a tough approach. Police have routinely refused letters of no objection for marches, meaning any such rallies will be unlawful; and many protesters already face lengthy custodial sentences for rioting, or other, serious charges. More prison sentences may follow.

A Shift In Tactics?

The risk, then, is that increasingly desperate elements within the generally law-abiding protest movement turn to violent attacks against police, the judiciary, or government officials.

Radical protesters have already used IEDs to target police. An IED exploded on 13 October 2019 in Mong Kok as a police vehicle drove past, and, on 20 April 2020, a partially active IED was sent in a parcel addressed to the Commissioner of Police. A number of smaller attacks have used pipe bombs.

A noteworthy threat, then, is of a campaign of IED attacks, perhaps orchestrated by small splinter groups within the protest movement. Given time, these radical elements could evolve into a small-scale, but gritty, insurgency.

Of course, the Hong Kong Police Force has the capacity to handle such a threat – particularly if bolstered by mainland resources – but the impact on the local business environment would be significant.

Clouds On The Horizon

The international environment only adds to risks. Criticism of the national security law is widespread outside China.

The British government has said that the national security law conflicts with China’s international obligations under the 1984 Sino-British Joint Declaration, and the European Union’s various institutions have voiced their disquiet.

The US has been most vocal, though, not least as Sino-American relations are in a parlous state. Washington had already condemned China’s mercantilist trade policy, blamed Beijing for the coronavirus pandemic, targeted telecoms company Huawei, and published a list of 20 Chinese companies linked to the People’s Liberation Army (“PLA”).

Now, measures in response to Hong Kong’s national security law will follow. Washington will further curtail the sale of high-technology products into Hong Kong, and will ban some local and central government officials from visiting the US. A descent into a cycle of tit-for-tat responses is possible, posing new threats to the business communities in both Hong Kong and Macau.

Separately, military tensions are rising in the South China Sea, in the Taiwan Straits, and on the Himalayan frontier with India. At present, these issues do not seem likely to spiral into conflict, but they do add to a climate of intemperance, suspicion and vituperation in Hong Kong, as elsewhere.

In short, Hong Kong sits on a geopolitical fault line, and is described by some as the “new Berlin” in an emerging cold war.

Impact On Business

Hong Kong’s economy had already slowed owing to the protests, and the outbreak of the coronavirus; GDP may contract by 5% in 2020. As such, many business leaders may welcome the law, as the first step towards re-establishing social stability in Hong Kong.

However, foreign investors should appreciate that developments in Hong Kong are not sui generis, but rather are part of the general deterioration of Sino-American relations, with much wider commercial implications.

Companies may now face demands for displays of loyalty from one or the other side – and choosing sides will impose costs. HSBC has voiced support for the law, but now faces ire in the UK and US; and Google may change the route of a high-speed internet cable to avoid Hong Kong. Negotiating this political minefield will prove testing.

In time, the law should also accelerate Hong Kong’s absorption into the Greater Bay area, and strengthen the dominance of mainland businesses. Already, in Hong Kong in 2019, Chinese companies opened more offices than either Japanese or US firms, and comprised 60% of the top 20 book runners on major dollar bond deals.

Mainland firms now dominate the initial public offering (“IPO”) market, and have accounted for 48% of syndicated lending in 2019, up from about 28.5% in 2015. Any return of Chinese businesses listed in the US to Hong Kong will only accelerate this shift, with benefits liable to accrue to those companies identified as politically reliable.

What Should Businesses Do?

Businesses in Hong Kong thus face a number of risks:

A near term threat stems from protests, and, perhaps, the emergence of a small bombing or IED campaign. Whilst such bombings may be small in nature, and probably targeted at the police or government officials, they remain nonetheless a threat to the public.

Other business risks derive both from becoming caught up in the political contest, and from large-scale shifts in the political, legal and commercial environment, all accelerating Hong Kong’s integration into mainland China.

In order to respond to these risks, businesses should take measures, such as:

  • Re-assessment of contingency plans to take account of disruptions, and threats to company property, deriving from protests.
  • Examination of risks of physical attacks, and/or from IED or bomb threats, hoax or otherwise. Companies should drill responses, including evacuation measures, and should establish first aid capability.
  • Establishment of failsafe communications mechanisms, so as to facilitate the issuing of clear warnings, and advice, to staff.
  • Assessment of a business’ political standing, so as to evaluate whether a company might face targeting. Such measures might include preparation for industrial action, particularly if the business is seen as “blue”.
  • Monitoring of the operating environment in Hong Kong, so as to assess any need for reappraisal of where to carry out certain functions, on a regional basis.
  • Consideration of how political, social and commercial ties between the US and China are sundering, taking into account the risk of having to choose one or the other market at short notice.

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.

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