Hong Kong Protests Signal Various Risks For Business

October 1, 2014 2:54 PM
By GREGORY J. MILLMAN The Hong Kong demonstrations highlight important and, arguably, often ignored facts about the risk climate in China, experts told Risk & Compliance Journal.

Associated Press Hong Kong protesters chant “Jiayou! Jiayou!” or “Keep it up!” while waving their cellphones with the LED flashlights sparkling in the dark as they gather on the streets near the government headquarters on Oct. 1, 2014. Not only do the protests raise questions about Hong Kong’s reputation for a predictably stable business environment, they come in a context of broader tensions over economic reform, labor issues, environmental standards and foreign business practices in China that should shape risk assessments, they said. For starters, it would be a mistake to think of China’s recent decades as the norm. ”The relative stability of the reform-era (late 1970s onward) may be considered an aberration if placed in relief against the numerous destabilizing events in China’s modern history,” observed Jamian Ronca Spadavecchia, founder and president of Oxbow Advisory, a political risk analysis firm. He recommended that companies operating in China “build risk scenarios around alternate outcomes that envision greater political, policy, and regulatory instability as well as state intervention, protectionism, and market access limits.”

The Wall Street Journal reported that fear of Hong Kong unrest spreading through China is influencing the response of China’s leaders. Experts who spoke with Risk & Compliance Journal agreed that while contagion is possible, especially if the demonstrations are violently suppressed, the likelihood is relatively low. “It would require a separate event on the mainland which causes rallies there for the events in Hong Kong to have an influence,” said Derek Scissors, a resident scholar at the American Enterprise Institute, “An example might be police violence at a mainland anti-pollution march. Then the two groups might start to mix messages along the lines of ‘Rights for everyone.’” But it could also require a leader willing to take up the cause, he said. So far, no such leader has stepped forward.

For business, the significance of Hong Kong’s demonstrations is less the direct impact or the possible contagion effect than the context in which they occur: rising labor costs, concerns about labor practices and environmental damage, political struggles over corruption, a slowing economy, and even discussions about removing the market-friendly chief of the country’s central bank. “I’m not sure firms have appreciated the dynamic that what has worked for China won’t work going forward. That is going to lead to tensions,” said Christian Lundblad, a professor at the University of North Carolina specializing in political risk and corporate investments. “What China has been from 1978 until now has been an export powerhouse and a country that built everything. That’s not an economic model for the future,” he explained. One way of dealing with tensions internally is to focus attention on external threats, Professor Lundblad suggested. This could mean more difficulties for foreign business in China. His is not a lonely voice. “Many companies also feel that China is becoming more nationalistic and less friendly to foreign companies. Whether this is true or not, it is the perception that counts, and if companies feel that way, they will look elsewhere,” said Jack Perkowski, managing partner of Beijing-based advisory firm JFP Holdings Ltd. and former chief executive of Chinese automotive component maker ASIMCO Technologies.

(Gregory J. Millman is a senior columnist with Risk & Compliance Journal He is the author of The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks, and several other books. He can be reached at +1 (212) 416-2352 or by email at gregory.millman@wsj.com Follow on Twitter @GregoryJMillman)

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