Paul Haenle, Damien Ryan, Gabriel Wildau and Jerome Hauer Ph.D. join Kevin Kajiwara to discuss the New Challenges for Companies Doing Business in China.
Kevin Kajiwara (KK): Good morning, everyone. Thank you for joining today's Teneo Insights webinar. I'm Kevin Kajiwara, Co-President of Teneo's Political Risk Advisory business here in New York City. On July 1st, a new National Security Law for Hong Kong, rubber-stamped by China's legislature only the day before, took effect. The law, when it was fully presented finally, was found to be very broad and vaguely written. So, while something certainly changed from June 30th to July 1st, exactly what has been the subject of a lot of speculation and analysis. Meanwhile, the state of relations between the U.S. and China has continued to deteriorate. Recent examples being, of course, the forced closing announced just a day or so ago of China's consulate in Houston, Texas. The signing of the Hong Kong Autonomy Act by the President. Even the UK government's decision to ban Huawei from its 5G network following a U.S. policy directive restricting technology sales.
So, today, we're going to discuss the developments in Hong Kong and put it in the context of the bigger picture; help you think through how the changes to the operating environment might affect you and your companies. To do so, I'm joined by three of my colleagues this morning. Paul Haenle is the Chairman of Teneo Asia Pacific, and while he's calling in from the U.S. today, he is based in Beijing where he's also the Director of the Carnegie–Tsinghua Center. Previously, Paul served Presidents George W. Bush and Barack Obama on the National Security Council as the Director for China, Taiwan, and Mongolian affairs. He was also the White House Representative to the U.S. negotiating team at the Six Party Talks nuclear negotiations on North Korea.
Damien Ryan is the CEO of Teneo's Asia Pacific Strategy and Communications Advisory business. He was the Founder and Managing Director of Ryan Communications, which was acquired by Teneo in 2017. Previously, he was a journalist with Bloomberg, and he also heads up our office in Hong Kong, which is where he joins us from today. And Gabe Wildau is a Senior Vice President with Teneo Political Risk Advisory and our Senior China Analyst in the U.S. Gabe joined us after 14 years in China, most recently as the Shanghai Bureau Chief of the Financial Times. So please join our conversation today. If you have a question for any of my guests, please use the moderator chat button on the top of your screen, and you can submit your question in writing.
Before we get into all of that though, it's worth noting that Hong Kong had a significant spike in coronavirus cases, up 40% since July 5th. And that spike is number one, frustrating contact tracing efforts. Two, it's forcing policy action in the territory. And three, it serves certainly as a cautionary tale, given the perception that Hong Kong thus far has been a success story in flattening the curve. So, to give us a quick update on that is Jerry Hauer. Jerry served as the Acting Assistant Secretary of Health and Human Services during the SARS outbreak, and was the Commissioner of the New York State Department of Homeland Security and Emergency Services during the West Nile outbreak. So, Jerry, give us a quick update on what you see happening in Hong Kong and why we should be concerned about that.
Jerry Hauer (JH): Well, Kevin, thank you. They are now seeing what they're calling the third wave in Hong Kong. They now have over 2,000 people infected. They've had 14 deaths. Currently about 645 patients are hospitalized. Over the last two weeks, they had a spike of about 600 new cases, and just Wednesday, they had over 115 new cases. A lot of the cases that they're seeing right now are in the elderly. The expectation at this point in time is that this third wave is going to overwhelm the public health system in Hong Kong. They've already run out of their first-tier isolation beds, and they're having to move critically ill people to second care facilities to isolate them.
They've ordered that people wear masks everywhere, particularly outside, but also indoors. They've closed 12 different types of public venues, and much like we've seen here in the U.S. and most recently in Australia, particularly in Victoria, behavior seems to play a large part in this. They think that in Hong Kong, the public became far too relaxed. They stopped wearing masks in public and the virus picked up and spread again. This is something we expect. This virus has a mind of its own. We're seeing it here in the U.S. They are reimposing very strict public health measures once again in Hong Kong.
KK: As you've brought it up, and since I've got you here, why don't you give us a quick update on the deteriorating situation in the U.S., beyond, of course, Dr. Fauci throwing out the first pitch for opening day between the Yanks and the Nats this evening.
JH: Yeah. Well, I'm sure Tony will do well tonight at the stadium. Unfortunately, here in the U.S., we got down to about 400, 450 deaths a day from a peak of between 23, 25, 2,600. We're now back up to about 1,000 deaths a day, and that number seems to be creeping up. Keep in mind, as we see all these new cases occurring throughout the Sunbelt, throughout the West Coast, there are now 12 states with an ongoing increase in the number of cases. The deaths lag by about two to three weeks. So I don't see at this point in time a drop-off in the number of deaths that we're going to see on a daily basis. In fact, I would expect that we'll see an ongoing uptick in the number of deaths.
Unfortunately, much like we saw in Hong Kong and we've seen in Melbourne and Victoria, behavior has played a large part in this. People got the message, particularly from the White House, that the cow could be let out of the barn. And the barn doors opened, the cow left, the virus, and it took off. Once you drop your precautions, once you let people start letting their guard down, the virus is going to spread. And since there is no national strategy, since there is no willpower in the government, both at the federal and state level, or will to do a national strategy, to say, "Let's lock the country down for a couple of weeks and reduce the spread, so it doesn't bounce back and forth from the West Coast to the East Coast to the South," I fully expect at this point in time we will see an uptick in the number of cases in the Northeast.
The magnitude of that uptick on the Northeast, I think will depend in part on how quickly we can identify a small outbreak and surround it. But at this point in time, behavior, both in Hong Kong and other countries, has played a very, very big role in the ability of the virus to spread. I think the messaging from the government and the will to take dramatic measures has not been there. And I think that, as I said earlier, once the messaging came out that the door was open, go out, do whatever you were doing prior to the pandemic, go out, enjoy the summer, all hell broke loose, and we're now paying the price for that.
KK: One quick question on Hong Kong. We have two questions from the audience here before we move onto our other panelists today. One question is whether you think or is there any evidence out there that there's any connection between the spike in Hong Kong and the large protest gatherings that took place around the time of the imposition of the new National Security Law at the end of June, early July.
JH: Well, it certainly is something that you have to think was a mechanism for the spread of the virus. You had people in close proximity, a lot of people not wearing masks, and they were there for extended periods of time, all the components to enhance the spread of the virus. Now, having said that, we didn't see the kinds of upticks here in the U.S. that we would have expected after the protests nationwide. We have seen some of the cities uptick, but a number of the cities, and again, it's possible that the increases could be related to the protests here in the U.S., but the timing is just a little off. But certainly, in Hong Kong, there's a good chance that with all the components in place, that the protesting did have an impact on the uptick in community spread.
KK: And finally, one last question from our audience. We're more than four months into the pandemic here in the U.S., and yet we're still seeing issues with testing. Why is that? We're still seeing delays of a week or more in getting results, even with private labs involved. What's going on?
JH: Well, first of all, we had the false start with the tests being put out by CDC being poorly constructed and not giving accurate results as a result of contamination in the testing reagents, so we got off to a bad start. We then wound up with tests that weren't accurate coming out of commercial companies. A lot of phony tests came out, imported tests from various countries that were just garbage. So again, we fell behind. Now what's happening, particularly as we're seeing this dramatic uptick in the number of cases, the reagents, the supplies, nasal swabs, things of that sort are just in short supply. The commercial labs that are doing these tests are simply overwhelmed.
Part of the problem here, Kevin, is with a seven-day lag period, sometimes even longer, you really lose your window of opportunity to do contact tracing. It's one thing if you have a day or two between sample and test results. You can start to go back. But if I had to remember, and I'm not sure I pass one of the cognitive tests that the President took, but if I had to remember seven days or 10 days of who I was in contact with in the current environment, it could be a bit of a challenge. So when you lose that component of contact tracing, it becomes almost meaningless. It really puts us at a significant disadvantage.
KK: Do you see relief on this front at all? I mean, it strikes me that fall is looming in front of us, fall, winter. In addition to the coronavirus, we will have the seasonal cold and flu season, which you'll get a sniffle and you'll think, "Hey, I might have coronavirus, so I got to go get tested." So, there will be a new surge in people looking for tests, and it will get worse.
JH: There's going to be a significant surge in the number of people showing up at doctors' offices, and emergency rooms, all wanting tests. Now, there is one test being looked at right now that will simultaneously test for both influenza and for coronavirus, where that winds up, because it's not widely available it's being tested right now, but that will help. But until we have something like that, the number of tests that are going to be demanded, that are going to be needed, is going to be extraordinary. So, it's going to place a huge burden on our laboratories and over tax the lab capacity.
KK: Got it. All right. Well, thanks very much, Jerry. I want to turn now to Hong Kong. And Damien, maybe start with you. Thanks, first of all, for joining us late this evening, but tell us how the new law is manifesting itself in Hong Kong. In terms of daily life, how people are changing behavior personally and professionally, and maybe actually considering that you're on the ground there, you can give a little context to what Jerry just talked about too, in terms of impact on life of the new spike in cases.
Damien Ryan (DR): Yeah. Okay. Good morning to you, Kevin and everyone else. Not too late, it's about a quarter to nine here in Hong Kong. So in short, look, there's significant anxiety and also pretty high confusion. I've got to say in the community about the National Security Law, what it means and how it's going to be applied. Now, this is stemming from both the severity of the law, Kevin, but also how broad and often, if you look at it, how vague the wording is. We just don't know, and may actually never know how far the law could be taken. To take a step back, the NSL was positioned all about restoring law and order in Hong Kong, which would then deliver political and economic stability for Hong Kong after a yearlong protest movement, right? It had been going on just too long.
The government also sought an end to any of this talk about succession or independence that would occasionally crop up from some minority parts of that protest movement. And remember the government, both of Hong Kong and China believe that was very much being fueled from offshore. So as a deterrent, the law has been effective because the protests and the dissent in Hong Kong has essentially ended, and we're 23 days into it. Now critics would argue that the NSL actually isn't about what I've just said. And it's more about going beyond restoring law and order and being used as, for example, a tool against foreign companies, a tool against foreign nationals. Especially in the context of what is drawing tensions between not just the U.S. and China, but the West and China. And we've got sanctions as well on top of that.
But let's start at why there is this anxiety and Gabe can go into more detail, but there’s 66 articles in the law that's criminalizing four types of acts, including succession and subversion. There's infrastructure around that law like hand-picked judges, like special units in the police and Department of Justice. There's now a Chinese security apparatus operating openly in Hong Kong. And from the business point of view, there's just multiple articles that are targeting really specific behavior and that's of high concern. So broadly, plenty of anxiety, plenty of uncertainty. And it's not just in Hong Kong, but it's global.
We now have a law that's strict, broad and pretty vague. And one that's got the potential to target any critic of China globally, in theory. So applying this Kevin, in the context of what we've got now, high stakes, geopolitics, it's justifiably making a lot of executives we're dealing with really confused, really concerned, because it's directly impacting their operations of their businesses in Hong Kong and outside and their people inside Hong Kong and outside of Hong Kong. Now related to what Jerry was saying in regard to COVID, that third wave we are experiencing has just coincided with the NSL. It's legitimately kept people off the streets because we're all working from home and there's now restrictions in place around movement and how many people can go out to restaurants and public spaces.
Now, what it has done is led to an era of probably a little bit more paranoia. However, this alone has not kept people off the streets in terms of protesting. COVID didn't do that. The NSL and its implicit threats, what lies inside the law, has suppressed the protest movement. Just one final point I'd make, is around context about why we do have that NSL. Keep in mind, Hong Kong does have legislative council elections coming up in September. The Democratic camp has won a lot of ground over the last couple of years, particularly in the last one year. And there's big concern that the local parliament could become deadlocked to the ability to get decisions made, to introduce rules, laws that target the protest movement. They're really concerned that was not going to be possible. And again, that's just an additional context of why we've got the NSL now. So, happy to pause there and take questions later, or give more context later.
KK: Damien, just to follow up on a couple of points, you just made. One with regards to these upcoming LegCo elections. Historically the corporate sector in Hong Kong has had a big influence on the makeup of the LegCo. In the bigger context of the new National Security Law and the mainland's sort of greater influence, how does that impact that dynamic between corporate Hong Kong or Hong Kong Inc.'s influence on LegCo versus let's call it mainland influence?
DR: Yeah, so it's a pretty sensitive topic, but what I can say is, in LegCo you've got about 70 seats and 35 of those are functional constituencies. So it's like lawyers, accountants, taxi drivers, traditional landholders, things like that. And so they've got 35 seats and then there's 35 that are out in the public across 18 districts. Now, what we've found is that out of those 35 seats, they're traditionally pro establishment or pro-Beijing. And there's been a lot of discontent, I guess, in those seats and their concern is that normally those 35, which could be counted upon thereby giving a majority or at least a really good start is now up in the air. Some of those could potentially vote against. And the other 35, you're seeing, the pro-democratic camp really have a strong run at the moment. So that's for LegCo.
The other point that you're touching upon is corporate Hong Kong and these traditional property companies and tycoons and conglomerates that have been seen to be based out of Hong Kong but have made their money out of China. And many of them were delayed in coming out to endorse their support for the law. And that's put them in a really difficult situation. And many of them have since endorsed it, albeit late, they have. But more to the point is around whether or not they see themselves as Western companies operating in Hong Kong or Chinese companies, Hong Kong companies operating and getting a fair share of their revenues out of China. That means that they are really compromised and there's no easy solution. And everyone is very nervous about that because again, it's really high stakes. And so we're still trying to work our way through that. And it's an interesting case study, but unfortunately one that's going to have real business impact in terms of how companies can operate here.
KK:And one other question from our audience for you Damien, it goes back to the COVID-19 situation and sort of looking at some of the numbers we're seeing in the U.S. versus the actual numbers we're seeing in Hong Kong. And they're wondering if there's not an overreaction in Hong Kong, or I guess by definition, it's almost an under reaction in the U.S. One of the questions I have is that it seems like ever since SARS in Hong Kong, there's been a recognition of how dramatic and how fast everyone needs to act to flatten that curve. So is it the case that it's not draconian, but rather everybody knows that they need to row in the same direction here? They need to limit their contact. They need to wear the masks, et cetera, et cetera. And that's just the natural reaction when these things flare up.
DR: Yeah, I think that's right. And this is the third wave. And frankly, it's just a bit embarrassing because Hong Kong was doing, as Jerry said, such a great job. And then all of a sudden we get hit with it. Look, there was an error of complacency because we've been dealing with this since kind of late January in a fairly serious manner. And we're now into mid-July, so we have got this. Hong Kong has got world class, not only health, but also specialists who are looking at the disease. And it's a bit like Hong Kong is in a similar situation as probably where Singapore is and parts of Australia. And that is that we thought that we had it under control, and now it's got the better of us.
And even today, you can look at the 120 cases, the bulk of those are local. The bulk of those are unaccounted for, and that's leading to real serious concerns in the community because business is being impacted. So the absolute numbers are low, but the potential for this to spiral out of control and set us back many, many months is absolutely real. So hopefully everyone's going to be taking it seriously, so we can get it under control.
KK: So, Gabe, Damien mentioned at the outset here about the confusion with regards to the content of the National Security Law or what it means because it's been written so broadly and vaguely. But I know you've done a lot of analysis and really dived into this. Give us a little bit of context here about what we really know about this law. What it says, what it does not say.
Gabe Wildau (GW): Sure. Well, one of the characteristics of the process by which the law was enacted was that we didn't see the full text until the National People's Congress in Beijing actually imposed the law and it took effect. But we now have the full text and we have implementing regulations that go with it. So broadly, you can think of the impact in terms of two parts. There are the crimes, that the new National Security Law defines, and then there's the kind of enforcement mechanism for prosecuting those crimes and for preventing them. So the four crimes are, succession, subversion, terrorism and collusion with a foreign country. I'll circle back to some of what that means, but legal scholars have argued I think persuasively that the second part I alluded to, the issue of the enforcement powers and the new enforcement bodies are maybe even more important than the new crimes.
We know from the mainland legal system, crimes that are pretty clearly defined on paper, turn out to be very vaguely defined or turn out to be sort of infinitely stretchable. The definitions of those crimes turned out to be infinitely stretchable when it's the mainland judicial and police organs that are actually enforcing and prosecuting those crimes. So that's why I think, in the Hong Kong context, it's important to look at those bodies. So, we have the four crimes, and then we have three new bodies that the law creates to enforce those crimes.
The first is the Office of National Security, which is a direct agency of the central government in Hong Kong. So it's not a Hong Kong government agency, it's a mainland government agency in Hong Kong. And their authority is to supervise, guide, coordinate and support the Hong Kong government in safeguarding national security. So essentially what we have is mainland intelligence operating openly in the city. Of course, we can assume that they were already operating in Hong Kong before, but now they're formerly authorized and operating in large scale in Hong Kong.
And so, what we've been advising clients is that this has serious implications for operational security of companies in Hong Kong because it raises the risk of corporate espionage and surveillance for companies operating in Hong Kong. And so, what we've advised is that any precautions that companies were taking or visiting foreign business executives were taking in mainland China should now be extended to Hong Kong. Because the mainland intelligence is operating kind of in force in Hong Kong now. So that's one of the three bodies.
The second one is a new Commission for Safeguarding National Security, which is part of the Hong Kong government, but which has a mainland official representative on this commission. And they're responsible for kind of managing enforcement of the law day to day. And then the third new organ is within the Hong Kong Police Department, which is a new department for protecting national security. And they are authorized to recruit outside personnel, which essentially means mainland police, they're calling them technical personnel and advisers, but it opens the door for mainland police to operate within the Hong Kong police force.
So when we look at these three bodies together, what we see is that the mainland authorities are kind of running the show in Hong Kong, at least with respect to this National Security Law. So the law puts mainland authorities much more in the driver's seat in terms of day to day operations in Hong Kong. In terms of the crimes, circling back to the crimes. I think this is where the law exceeded the expectations a lot of people had. We thought the law was going to be finely focused on.
Some of us thought it would be relatively narrowly focused on the protest movements and crushing the protest movement. But what we see is that these national security crimes are so broadly defined that they would potentially capture a lot of other activity.
And one of the most concerning provisions is this assertion of extraterritorial jurisdiction, where, in theory at least, someone could be prosecuted under this law who's not a Hong Kong resident and who's not physically present in Hong Kong when he's, for example, posting something on social media that seems to call for Hong Kong independence, or if he seems to be funding a Hong Kong activist group, if he's a foreign agent or a foreign national sending funding to a non-governmental organization in Hong Kong. He could be prosecuted.
We see that companies that are involved in applying, imposing or enforcing sanctions on Chinese companies or on Chinese government, again, a foreign company acting from outside China could be prosecuted under this law for collusion with a foreign power.
The law also empowers the Hong Kong government to increase regulation of journalism and social media. It empowers them to demand that social media companies delete offensive messages or delete chat messages and to provide identifying information about their users to the Hong Kong police and to imprison technology company employees who fail to comply with those requests. Damien mentioned handpicked judges for national security crimes. The Hong Kong police are allowed to, in certain circumstances, use indefinite detention without trial as part of their investigations.
So, those are a few of the provisions that are causing concerns. But I think that what remains to be seen and what we could talk more about is how will these tools actually be applied. These risks are still theoretical at this point. I think a lot of the business community is in wait and see mode to see will the government actually use these new powers aggressively, or is this just a Sword of Damocles hanging over everyone's head, but that they're not actually going to apply these powers. So, I think that's where we stand right now.
KK: So, I want to come back to what the practical implications are, given the limitations of what you just said there at the end. But I want to look at this in the bigger picture, because I think it's impossible to remove all of this from the bigger context of China policy and China ambition, and frankly, even US-China relations. So, Paul, let me start by asking you why now? Damien and Gabe pointed out the protest movement that had been going on for the last year as being one catalyst. But we're thinking about the bigger picture and vision of China and its position in the world. Why is this happening now?
Paul Haenle (PH): Well, thanks, Kevin. I do think, as Damien pointed out, the events over the last year, the instability in Hong Kong that the Chinese Communist party had witnessed did have the effect of galvanizing and leading to this decision to do so. At the end of the day, with the Chinese Communist party in Hong Kong, I think it's all about control and maintaining control and being able to have mechanisms to shape what happens in Hong Kong, I think, is important for Beijing.
I think President Xi and the Chinese Communist party saw the instability in Hong Kong as a sign of weakness, and I think they worried about that. I think the protests in 2009, where they saw protesters in the streets in Hong Kong, desecrating Chinese flags, and they had no mechanisms to shape the events, both short term, but also more long term, as we've been discussing, I think that was unacceptable for Beijing. And they decided they needed to move forward on the National Security Law, despite the strong international reaction, I expect, they knew it would bring.
And so, I think Beijing also saw reasons why this was a good time to do that, first of all, the National People's Congress being held was an event that could compel this action. But secondly, the spread of COVID, they felt, I think, might limit the risk of large-scale protests in Hong Kong in response to the announcement of the National Security Law. I think also, as Damien has alluded to, the legislative council elections in the fall, I think Beijing wanted to get out in front of that and assert greater control in Hong Kong before the elections. I think there's other factors, like Beijing right now is dealing with domestic frustration over COVID and declining economic growth. Stoking mainland Chinese nationalism around issues related to Hong Kong helps to shift the attention of the Chinese people.
And then lastly, I think we can't overlook the fact that clearly, we've learned that President Trump apparently told President Xi that U.S. criticism would be muted over Hong Kong because he wanted progress on the trade deal. And I think that was obviously not the cause, but it was certainly a factor in China's decision in moving forward now.
KK: And while that may have been the case at the time that they had that discussion, obviously the other narrative right now is the U.S. election cycle. And we have seen this kind of escalation in actions. I listed a few of them at the outset of the call. And I know that all along there has been a seeming Chinese pattern of responding proportionately to U.S. actions in a tit for tat way, rather than in an escalatory fashion. But it does feel like recently there has been more actions taken on the U.S. side. Are you anticipating that there's going to be more of a reaction from the Chinese side, particularly since some of these are highly visible, whether it's the closure of a consulate in Texas or Huawei actions and the like?
PH: Yeah, it's pretty clear, Kevin, that what we're seeing now coming out of the Trump administration is that the reelection campaign strategy to get tough on China has also had the effect of creating a very permissive environment in the administration for the hawks to pursue this much more intensified and antagonistic campaign against China in the months leading up to the election. To a certain degree, up until now, the hawks had been held in check by President Trump because he wanted to pursue higher priorities like making friends with President Xi, having a good relationship with him, and getting a trade deal. But as the U.S. election approaches, the hawks in the administration, I think led by Secretary of State Pompeo, now see an opportunity to intensify the pressure on China on a range of fronts, political, business, technological, and financial.
Some of this, I think, as I said, is election year politics. But I also think what we're seeing is part of an effort by the hawks in the administration to put in place as many measures as they can now on China, ahead of a potential Biden administration that might pursue a more restrained China policy. They want to make it harder for Biden to walk back on things that they've done. Some of this is also Congress. There's growing bipartisan support for greater measures to punish Beijing for policies in Hong Kong, Shenzhen, cutting flows of American money and technology to China.
And a lot of this is rhetorical. There's been an unprecedented number of speeches on China by senior officials, National Security Advisor O'Brien, the FBI director, Attorney General Bill Barr. Secretary of State Pompeo will give a speech today condemning Beijing for a range of issues, but also making the ideological point that I think is the Trump administration's signature on China, that the Chinese Communist party is an existential threat to the U.S. and the global system.
And how all this rhetoric turns into action, I think, we'll have to see over the next few months. But they're talking about certain things, like financial sanctions against Chinese officials involved in carrying out the new National Security Law, maybe even, although I think less likely, sanctions against banks serving those officials. There's talks about barring entry into the U.S. of the Chinese Communist party members and their families, potential bans on TikTok, and maybe even the Chinese app WeChat, and then finally possibly passing a law which would force Chinese companies not complying with U.S. audit standards to delist from U.S. stock exchanges. So, there's a lot the Trump administration can do over the next several months, and I think we're moving into uncharted waters here, Kevin.
KK: And while I've got you here, Paul, I can't help but ask this question. And I'd like it to put back your National Security Council hat for a second and rewind the tape. Do you think that we, meaning the United States, made an analytical error or strategic error even in terms of policy towards China, based on an assumption about how a country could evolve, meaning that a richer China was going to be a more open China, rather than, say, a more assertive China? Were we making a policy on an assumption that was just not accurate?
PH: This debate has been going on obviously recently since the Trump administration came forward. My own sense, I do not think, and I served as China Director in both the Bush administration, Republican administration, and the Obama administration in the first year, a democratic administration. I don't think U.S. policy was ever based on an assumption of political liberalization or greater market liberalization. I think it was a hope, maybe it was an unrealistic hope, that this would happen, but I don't think it was an assumption or a guaranteed expectation. The policy of engagement was aimed to shape China's rise, and political evolution was part of that. It was a bipartisan approach supported by Republicans and Democrats. That clearly has not happened.
Now, whether it was a mistake to pursue those types of policies to shape China's rise in more positive ways, I think you have to ask the question, "What was the alternative?" Should we have fostered an economically weak and isolated China? Would that be in U.S. interests? I think going forward, we just simply have to be more clear eyed about what we're dealing with in terms of China. And there are growing bipartisan concerns around a number of fronts with China, the direction of its political repression, the resurgence of the SOEs at the expense of the private sector in China and foreign company, discriminatory trade practices, economic policies that don't have reciprocity. We can go on. We have to decide how we're going to deal with China.
The Trump administration and the hawks, I think, would say that, because our political and economic systems are so different, that they're fundamentally incompatible, and therefore we cannot coexist and we need to take deliberate steps to damage China's rise and have a much more confrontational approach. The other side of the debate would argue that, despite these different political systems, we can find a framework to compete with China more aggressively and more head-on in terms of our differences, but also to cooperate where it's in our interest to do so and to find a way to coexist with Beijing, recognizing that there will inevitably be a heavier emphasis on the competitive aspects rather than the cooperative ones. My sense is that, if Biden wins, that's the direction that he will go. It will be a tougher China policy recognizing the reality of where China is.
KK: Right. I want to get now to where the rubber really hits the road for the purposes of this call, which is the impact on global corporations doing business in Hong Kong and, by extension, in greater China. And I want to hear from all three of you, but maybe, Gabe, I'll start with you because you've written extensively on this. So what are your thoughts now on, given there's a spectrum of industries that have got an interest here, everything from the financial services industry heavily represented in Hong Kong, of course, and professional services to the technology platforms, which have already been alluded to, to more industrial or consumer-based companies that have based their Asia operations in Hong Kong, to media and, of course, the non-governmental sector?
Give us a sense of what this now means for that spectrum of industries, Gabe, and I'd love to hear you guys' views on whether some of the other large capitals in the region are attractive alternatives or if they have their own issues and problems and shortcomings. So, Gabe, maybe you could start and then we'll hear from Damien and Paul in response.
GW: Yeah. So, I put out some research where I've attempted to divide the kind of activity in Hong Kong into different sectors and analyze the impact of the law in different sectors. And so broadly speaking on one end of the spectrum in terms of that classification of sectors, I think we have the financial services industry where I'm forecasting that the impact will be relatively modest because there isn't another financial capital in the region that can really rival Hong Kong in terms of what Hong Kong's capital markets have to offer in terms of liquidity, in terms of market capitalization and also in terms of this very large and stable base of clients, which is Chinese companies going to Hong Kong to raise capital. Investment banks in Hong Kong are able to kind of rely on Chinese clients as their foundation, and then clients from Southeast Asia, even from Europe, from South Asia, are kind of another layer of client and deal flow in Hong Kong. So that gives Hong Kong unique advantages.
So, my forecast is that Hong Kong will remain a regional center for finance. The other aspect there is just in the last few weeks because of what Paul mentioned in terms of possible delisting of Chinese companies in the United States and in New York, that there's been a flood of new IPOs in Hong Kong, which if anything, has sort of strengthened Hong Kong’s position in financial services. On the other end of the spectrum is the kind of journalism, social media technology, civil society, NGO sector, which I think is most at risk from the law, because some of the new powers I mentioned earlier regulating social media. We've already seen Microsoft, Google and Facebook say they're suspending cooperation or suspending processing of requests from the Hong Kong police to hand over personal data on their users to the police. If there's a showdown with where the police demands data and these companies refuse to provide it, if a local employee of these technology companies, one of them were to be arrested for failing to turn over data that could catalyze a mass exodus of social media or the technology companies from Hong Kong.
So, I already said the law gives the Hong Kong government more power to regulate journalism. Previously, Hong Kong had been basically a free speech zone for journalism and commentary. A lot of media organizations based there, Asia operations in Hong Kong. We've seen already the New York Times saying they're moving some non-China, non-Hong Kong focused editorial operations out of Hong Kong to Seoul. But if we see demands to censor media coverage, if we see journalists threatened because of things that they published, we could see an even fuller exodus out of Hong Kong from that sector. In the middle of those two poles, I think is sort of the general nonfinancial corporate sector and what I've been thinking through there is I think for companies that are using Hong Kong as a base for their China operations, the continued draw of Hong Kong and the attractiveness of Hong Kong remains strong, and they're unlikely to exit on mass. They will become more cautious about what they say publicly, about what they permit employees and executives to say publicly about corporate marketing statements to avoid running afoul of the law.
I expect acceleration of the ongoing trend towards localization, relying less on foreign expats in Hong Kong, more on Chinese mainland and Hong Kong people to staff the Hong Kong operations of these foreign companies, because given the vagueness of the law, these local employees have this kind of intuitive sense of where the red lines are for what they can and can't say and do in order to avoid running afoul of the law. But companies that have been using Hong Kong, not mainly or not primarily to serve their China operation, but rather as a kind of pan-Asia hub, that's the category of nonfinancial corporates where I think we could see some movement out of Hong Kong because they're not relying on those links to Mainland China and employees may prefer living elsewhere just for safety reasons. It may be more attractive to go to Singapore, to go to Tokyo, to go to Sydney, Bangkok.
DR: Yeah. And if we can pick up on that, Gabe and Kevin, I think you're right. The Hong Kong has got 50 international banks, 70 international law firms, 100s of buy-side firms, professional services firms. They're all there to serve capital markets. You can't replace that. And I don't think they're the target. They're doing perfectly fine, helping mainland companies achieve growth or attracting capital. Where the issue is going to be is those institutions attracting talent into Hong Kong if that is needed, but I take your point about more of a localization there or sinofication. But MNCs, remember, Singapore's a logical choice. The reality is most MNCs scaled back a lot a decade ago from Hong Kong. And they went to where the customers were. So for Southeast Asia, that was Singapore and that was either straight into Beijing or Shanghai. So a lot of the MNCs really have a reduced presence here. Tech companies, most of them are in Singapore and there's actually a presence in Hong Kong, but not as large as what you may think outside.
A big question, I think, is not about international companies, but I would also point out that Hong Kong has a lot of Hong Kong companies who are equally concerned about what this law may mean. So a big question is, could we see a scaling back of Hong Kong or those companies which are predominantly Hong Kong based that have actually international operations? And ironically, could you see a pulling back of those companies, which is one to watch. Just a couple of other points just in regard to the Article. That Article 21, remember, that's impacting any media or any content issued globally, so it relates to social media posts, articles, comments, deemed to incite secession. There's also another one related to subversion. But that's got a lot of people really concerned. And even though extradition to mainland is not explicitly said in the law, it is implied and that’s implied under Article 56. But you've got a lot of scenarios playing out like New York Times that Gabe mentioned there.
And specifically you've got this Article 38 that says that people outside Hong Kong can be prosecuted for offenses under the law, so it applies to actually everyone on the planet, now maybe interpreted to hit to the political dissidence sitting in New York or London or Taipei, and they face arrest when they come through Hong Kong. But it also could mean, is there a scenario where a high profile Western executive travels to Hong Kong, held on arrival in retaliation to, for example, the arrest of a Chinese national abroad? Well, not directly under the law, but it potentially could happen. Could it mean that a tourist visiting Hong Kong is arrested because of a post on social media? Absolutely. That's a potential there.
Final thought just regarding Article 29, keep in mind, Kevin, that a person or organization imposing sanctions, and this was alluded to earlier, blocking or engaging other hostile activities against China is committing an offense. Now, this is a concern because the section places foreign firms, especially from the U.S., in a difficult position as they impose sanctions on China at the request of the U.S. Do you comply with the U.S. and fall foul of the Security Law and of China? Or the other way around? And that's why there's this level of confusion at the moment, Kevin.
KK: Yeah. So, I want to pick up on that. And Paul, I want to turn to you. We're up against the clock here. So, I'm going to give you the last word. But obviously, people have been musing about writing the obituary of Hong Kong many times for a long time, starting with the handover, which is about as dramatic of an event as you could have for the territory. And I'm also struck by some of the parallels, just go with me here for a second, with regards to London. One, when the Brexit vote was held, there was all of the speculation that there would be this mass exodus of businesses from London to the continent, and it kind of ignored some of the things beyond the bottom line that anchored companies and people in some of these places. So, I guess the bottom-line question here, is there something really different this time when you look at all of those Articles that Damien just enumerated and detailed? And look at the industrial spectrum that Gabe detailed, is there something really different now?
PH: I tend to agree with what Gabe and Damien have been saying. Basically, I think whether you're going to see a rapid exodus or more gradual adjustments over a longer period of time, I think will depend on how the National Security Law is implemented. Certainly it's broad and vague and worst case assessments create significant concerns, but there's a lot of advantages for firms in Hong Kong, especially financial firms. Now what's interesting regionally is to see what other countries are doing to try to capitalize on the fear that the National Security Law has created. In Japan, they're debating a plan that would make Japan a more attractive investment hub for international firms. They're trying to attract human capital and firms that might leave Hong Kong. There's a lot that Japan would need to do. But Singapore, obviously, we're hearing now from our contacts in Singapore, that there's greater interest from firms in Hong Kong that may want to relocate.
However, when you ask them how much movement they've seen, they say actually not much just yet. And even Taiwan, they've created this Taiwan, Hong Kong office for exchanges and services that will assist Hong Kong citizens and businesses to come to Taiwan. So countries are trying to maneuver themselves to be able to capitalize on if there is a fairly rapid exodus, but that just has not happened yet. And I think people are waiting to see how this is implemented.
China, on the other hand, this is my last point, they see all of this happening and they're trying to take steps to prevent such a mass exodus. One of the ways they're doing that is through this new initiative, this Wealth Management Connect, which Carrie Lam has proposed, which would make Hong Kong more international and turn Hong Kong into a more prominent offshore renminbi center, to try to transform Hong Kong really into the hub for management of private wealth and greater connectivity between Hong Kong financial markets and the mainland. And so they're trying what they can do to keep people to stay in Hong Kong and prevent this greater exodus. So again, how this plays out, I think will depend on how the law is actually implemented and we'll see.
KK: Well, guys, this has been another great masterclass in what is happening and helping us think through that. And I'm sure we will assemble this group in the future and on a number of occasions as this. As the implementation of the law occurs and as the picture becomes clearer, we'll get you back. So, I want to thank you. I want to tell everybody that we will be back on Thursday, August 6th with our next call. The topic is going to be the U.S. election right there in advance of the two parties' nominating conventions over the month of August. So please join us then. But meanwhile, I'd like to thank Damien Ryan, Paul Haenle, Gabe Wildau, and, of course, Jerry Hauer for their time. And thank all of you for joining us this morning again. Have a great day and all the best for the weekend. Thank you.
