I would like to apologize for the lack of updates on the blog in recent weeks. I have been busy learning how to use various AI tools to improve my effectiveness, which has taken up much of my time. However, I am excited to share with you that I am determined to keep updating this blog and share more with the help of these tools.
I am also thrilled to introduce a podcast that will accompany the blog, and I hope that subscribers will enjoy it.
Fractured Foundations - A Report on Hong Kong
Today I want to talk about Fractured Foundations, a report fresh off the press by Atlantic Council on the fundamental changes in Hong Kong over the past three years. The report highlights six institutional risks that need to be addressed urgently:
Unpredictable public policy administration.
The possibility that Beijing may alter the Hong Kong dollar's peg to curb capital flight.
Financial institutions may face challenges complying with international sanctions due to the existence of two distinct legal systems.
Individuals and businesses may not have access to an impartial judiciary, thus eroding the rule of law.
Businesses and individuals may face a more opaque environment as freedom of expression dwindles.
The government may increase surveillance, compromise privacy, and create new data security risks.
The report suggests businesses should approach outreach to Hong Kong authorities collectively as a political campaign, emphasizing the importance of the norms that underpin Hong Kong's competitiveness. In lobbying against further changes in Hong Kong's legal and institutional structures, companies should emphasize that any crackdowns on media outlets would endanger the flow of information needed for commercial and financial transactions, and create new difficulties for addressing disinformation.
Businesses should also pay attention to their compliance infrastructure. Companies in Hong Kong face increasing compliance challenges due to the growing number of restricted individuals and corporations. Financial institutions should develop contingency plans to manage high-risk clients becoming subject to sanctions by the United States or China, or potential disinvestment.
What "National Security" Really Means in China
While I agree with most of the observations and recommendations of the report, it might have overlooked the underlying significance of the idea of "national security" in China, and especially why the CCP deems Hong Kong a “vulnerability” in this regard.
Hong Kong was once the go-to destination for business, where Chinese and American entrepreneurs came to achieve what they could not accomplish in their respective countries. It was a hub of opportunity and innovation that attracted people from all over the world.
Since 2012, Hong Kong's political landscape has undergone a tectonic shift towards Beijing's priorities, resulting in a loss of influence for the local leadership. As Hemmingway once said, changes happen gradually at first, then suddenly. In Hong Kong, the turning point came with the imposition of the National Security Law in 2020, which established an all-encompassing system of authority.
Even so, some businesses in Hong Kong hold onto the hope that they will continue to receive preferential treatment despite the change in the landscape.
Totalitarian states view everything as a threat, not because they fear being replaced, but because they excel at maintaining power as if their authority could continue forever. What they lack is the ability to handle power transitions, whether through the death or incapacitation of their leaders.
What they are genuinely apprehensive about is internal competition. In democracies, there is an election process, whereas, in totalitarian states, power transitions frequently involve violence and the removal of the current leader.
During his tenure as Chongqing party leader, Bo Xilai, a charismatic princeling and rival to Xi, had implemented tactics that Xi later adopted. However, his approach was too overt, posing a threat to the party's integrity and causing division. Before Xi's ascension, the Party Politburo ousted Bo from his position and imprisoned him. Even Bo's ally, Zhou Yongkang, the head of the party's security apparatus, was expelled from the party and given a life sentence.
Since Xi Jinping came to power in 2012, the CCP has aimed to consolidate power and prevent fragmentation. The party's elites understand that any division could ultimately lead to their demise. As a result, "national security" encompasses anything that may disrupt the power structure, no matter how remote the potential destabilizing factor may be.
At the CCP’s 20th Central Committee 2nd Plenary meeting last week, the most crucial item on the agenda was the centralization of power in the hands of the party. There may be some confusion about the change's significance since some consider the party and state to be the same entity. While the ruling elites, or the top echelon of the party, and the state apparatus, or the bureaucracy, often overlap, there have been inherent conflicts between the two throughout history. It is worth noting that during the Cultural Revolution, Mao essentially launched a coup d'état against the bureaucracy using guerilla warfare tactics and a network that remained functional in the 1960s.
The events of recent years in mainland China can be explained in four simple principles: when conflicts of interest arise between the public sector and private enterprises, the priority is always to serve the public interest. In conflicts between the party and the state, the party takes precedence. When there are conflicts of interest between Beijing and the provinces, Beijing's interests will always be given priority. Any element that may cause fractionalization within the party or the nation will be dealt with swiftly and decisively.
The CCP deems it unacceptable for businesses to exert influence over national policy direction. Provinces should never prioritize their interests over those of the nation or use the central government for their own gain. When the bureaucracy's goals diverge from those of the party, personnel and institutions are precisely replaced to align with the party's stance.
Hong Kong's liberal business culture, global connections, and unique institutional framework are the cornerstone of its values. However, the CCP ruling elites view these essential features of the city as vulnerabilities rather than assets, driven by their sense of paranoia.
My outlook for the future of Hong Kong is bleak. The CCP's persistent paranoia will not dissipate unless there is a fundamental shift in the nation’s institutional structure, which historically takes centuries, if not millennia to achieve.
It is important for businesses and individuals to remain vigilant in the face of the changing landscape in Hong Kong. Despite the challenges, there is still hope for Hong Kong. We the Hong Kongers are resilient, and the values that have made it a thriving metropolis can still be preserved. It is up to all of us to advocate for these values and fight for a future where Hong Kong remains a beacon of freedom and prosperity.
I will continue to monitor the situation in Hong Kong and provide updates and analysis. I would like to invite feedback from my readers and encourage you to share this blog with others who may find it helpful. Last but not least, thank you for your time and support. I will update this blog and podcast more frequently from now on. Stay tuned.
Yours Sincerely,
Simon
What "National Security" Really Means in China