SVA Update Number 18 – Hong Kong Situation – Threat Assessment – 6 October 2020

The smaller scale of protests on 1 October 2020 highlighted how the anti-government movement in Hong Kong has lost momentum. Indeed, Chief Executive Carrie Lam Cheng Yuet-ngor has stated that her government had restored stability – if at the price of much closer integration into mainland China.

Looking forward, though, a critical risk in October 2020 will be the possible imposition of US sanctions against a major financial institution, with potentially serious implications for Hong Kong’s business climate. Companies should position themselves accordingly.

National day protests

The numbers attending protesters on 1 October 2020 contrasted with those of a year ago, when unrest spread in the wake of the shooting of a student in Tsuen Wan. Those protests, which embarrassingly occurred on the 70th anniversary of the People’s Republic of China (“PRC”), heralded destructive sieges of Hong Kong’s universities in the subsequent weeks.

By contrast, this time some 6,000 police deployed across the city, in an effort to pre-empt pop-up protest action, and arrested over 80 people. Such pre-emptive policing, combined with the COVID-19 outbreak, and the adoption of the National Security Law in May 2020, seemed to prove effective in reining in the demonstrations.

Paying the piper

This return to stability has come at a price, though. In particular, the unrest has accelerated Hong Kong’s integration into the People’s Republic of China’ (“PRC”).

The crisis has shifted power from the Chief Executive, towards CCP officials, such as Luo Huining, head of the Central Government Liaison Office, and Xia Baolong, head of the State Council’s Hong Kong and Macau Affairs Office. This shift has implications for governance; local Hong Kong officials are coming to eschew bold measures, for fear of taking the “wrong decision”.

The crisis has also weakened the Legislative Council, which has lost credibility owing not only to extended filibustering by the pan-Democrat camp, but also to pro-government efforts to remove legislators. The result is a weakening of the balance underpinned by Hong Kong’s Basic Law, its mini-constitution.

The new Office for Safeguarding of National Security, under Zheng Yanxiong is also now supporting Hong Kong Police Force’s efforts to maintain security. For its part, the Police Force must work to gradually re-build trust, and must not be seen to act vindictively, no matter the intensity of feeling.

The next challenge may be over the judiciary. Indeed, James Spiegelman, a prominent Australian jurist, in late September 2020 resigned from judicial responsibilities in Hong Kong. Some other judges may follow, although for now the system retains its integrity and is functioning well.

Storms from without

Worse, pressures from outside will continue to buffet the city. Hong Kong has become a pawn in great power competition, with Washington championing the protest movement – most recently, by demanding the release of 12 individuals detained fleeing into Chinese waters, and by denouncing as “outrageous”, arrests on 1 October 2020.

This trial of strength is drawing in other states: the UK is embroiled in a row over rights afforded holders of British National Overseas passports; Australia is seeking to dilute Chinese influence over its economy and society; and Canada’s courts are holding hearings on the extradition of Huawei executive Meng Wanzhou. Washington is also seeking to rally Australia, Japan and India in a military partnership.

However, the most immediate threat to Hong Kong’s business community comes from punitive economic measures by the US, such as the removal of previously preferential treatment of Hong Kong’s exports, financial sanctions on individuals, tighter export controls, and less generous tax treatment of shipping.

In particular, by 12 October 2020, under the Hong Kong Autonomy Act, the US State Department must prepare a list of individuals who have, “facilitated the curtailing of Hong Kong’s autonomy”, and the US Treasury Department must draw up a list of foreign financial institutions that have allegedly assisted in such actions.

President Trump will then have to decide whether to impose sanctions on some, or all, of these individuals and foreign financial institutions; and in doing so, he will take account of the parlous state of bilateral relations, and the uncertainties arising from the US election process.

Any new sanctions will surely affect Hong Kong, although gauging their impact is hard. Much will depend on how much damage Washington wishes to do. Sanctioning individuals will not matter much, but targeting a major financial institution could destablise not only Hong Kong’s financial industry, but perhaps also the city’s dollar peg.

Companies should thus not be complacent about the risk. It is also worth noting that Washington’s measures on Hong Kong have consistently proven tougher than expected – meaning that the next round of measures may well have more bite than expected. The model seems increasingly to be that of sanctions against Moscow in the wake of the seizure of Crimea in 2014, measures that essentially pushed Russia out of the western financial system.

A further worry is that bellicose posturing, in the Himalayas, the South China Sea, and the Taiwan Straits could yet result in an accident akin to the 2001 EP3 Spy Plane incident. Of course, all parties have an interest in preventing escalation, but a sudden spike in tensions, even if quickly resolved, would still have big implications for Hong Kong and the region.

The new normal

All of these developments are accelerating Hong Kong’s integration into mainland China. Indeed, a decision on 23 September 2020 by Ping An, a Chinese insurance business, to raise its stake in HSBC to 8%, and so become the largest shareholder, highlighted how intertwined mainland and Hong Kong businesses are becoming.

Imposition of further US sanctions will only reinforce this trend, both by forcing the Chinese state to shore up businesses in Hong Kong, and by encouraging Chinese companies to return to the Hong Kong Stock Exchange.

As a result, Hong Kong is becoming the friendliest place in which Chinese companies might seek financial services, resulting in a change of orientation for Hong Kong. This new model may yet promise a path to further prosperity, but any transition seems likely to prove bumpy.

What should businesses do?

Businesses must respond by:

  • Carrying out independent analysis to assess a company’s potential political exposure, taking account of the risks inherent in clumsy use of social media.
  • Re-examining internal processes, so as to amend standard operating procedures to match those in the PRC.
  • Re-examining supervision and oversight mechanisms, as well as recruitment policies, so as to place emphasis on linguistic and cultural capabilities, in addition to any requisite skill set.
  • Establishing robust communications mechanisms, so as to issue clear warnings and advice to staff, and to maintain communications with other offices.
  • Considering the possibility of violent responses by small, but radical protest elements. The prospect of such attacks is diminishing, but the chance of a resurgence cannot be eliminated.
  • Responding to increasingly irksome compliance obligations, with attention to financial sanctions, and their impact on payment and banking systems.
  • Considered responses may require the establishment of new legal structures.
  • Planning for a sharp deterioration in Sino-American bilateral ties. Boards should consider how sudden economic decoupling could affect that business.
  • Preparing for regional crises, with 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 Straits.
  • SVA has extensive experience in providing practical support in relation to operational security, planning, threat analysis and crisis management.

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

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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.