Index trend
Previous quarterly editions
Expropriation Risk: HK: 51 51 51 51 ► T: 40 40 38 38 ►Political Violence Risk:HK: 48 48 48 48 ► T: 48 48 48 48 ►Terrorism Risk:HK: 10 10 10 10 ► T: 10 10 10 10 ►Exchange Transfer and Trade Sanction Risk: HK: 13 13 13 13 ► T: 13 13 13 13 ►Sovereign Default Risk:HK: 15 15 15 15 ► T: 26 26 15 15 ►
Overall Risk Temperature HK: 32 (Low) TREND ►Overall Risk Temperature T: 29 (Low) TREND ►
Special topic: Gray zone aggression
Degree to which the country relies on outbound gray zone action to achieve its strategic objectives1 = Not at all5 = Gray zone action is a core tactic
1
Impact of inbound gray zone attacks on the country1 = Negligible impact5 = Significant impact on economic growth and/or political stability
4
China under President Xi Jinping has vowed to end Taiwan’s independent democratic system of government and bring the island under Beijing’s rule. Xi has stated that he would prefer to do this peacefully, but China has been speeding up preparations for military conflict in the Taiwan Strait.
The chief restraint on China’s ambition to regain Taiwan is Beijing’s fear over drawing U.S. forces into direct conflict. Washington maintains a policy of “strategic ambiguity,” seeking to convey a commitment to Taiwan’s defense that is strong enough to deter a Chinese attack but not so strong that it emboldens a Taiwanese leader to declare independence. The current U.S. president, Joe Biden, has personally promised to come to Taiwan’s aid if China attacks, but this verbal commitment does not have the strength of a defense treaty.
To advance its objectives without provoking a conflict with Taipei or Washington, China has adopted a slew of gray zone tactics to intimidate Taiwan and wear down its ability and will to fight. These include cyberattacks and political interference, the use of coast guard and maritime militia to threaten Taiwan’s own maritime activities, and the growing frequency of Chinese air and naval assets operating near Taiwan.
One gray zone tactic that China has used successfully is the poaching of Taiwan’s diplomatic allies. Since the independence-learning Democratic Progressive Party took office in 2016, China has lured 10 countries to abandon relations with Taiwan and establish them with Beijing instead. Taiwan today is officially recognized by only 11 sovereign states and the Holy See. Beijing’s intent is to isolate Taiwan on the international stage.
Of more immediate concern is China’s growing use of military exercises to wear Taiwan down. Sorties of fighter craft regularly cross the median line in the Taiwan Strait that acts as an unofficial dividing line between the two sides. These sorties cause Taiwan to scramble its own fighters. China’s intent is to normalize such incursions and wear down preparedness in Taiwan. Similarly China has been practicing for a blockade of Taiwan, notably after Taiwan’s president met with high-level U.S. politicians in 2023 and again after President Lai Ching-te took office in May 2024. Neither Taipei nor Washington has been able to prevent Beijing engaging in these gray zone activities.
Hong Kong has no foreign policy of its own and so cannot engage in gray zone activities. However, opposition politicians and activists in Hong Kong have long accused China of conducting something akin to gray zone aggression: incrementally undermining guarantees agreed to during the handover of the city from the United Kingdom to China and keeping its de jure commitments in place while using national security legislation, electoral reform and other techniques to stifle freedom of expression in practice.
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Taiwan actively courts foreign investment with favorable tax rates and sweeteners such as building roads and ensuring water supplies for foreign-owned enterprises. Taiwan also advertises its stable legal and regulatory environment. There is nothing to suggest significant risk of Taiwan’s government expropriating foreign assets.
Hong Kong's government recognizes that foreign business is central to the city’s economy, but recent developments are undermining confidence in the business environment. One is the politicization of the judiciary, which has the potential to erode confidence in a fair legal system. There are also concerns that the much-respected Independent Commission Against Corruption is being politicized. Also, in August the government proposed a new cybersecurity law that raised alarm bells about the protection from government predation of proprietary data among foreign firms. Google, Amazon, Meta and the American Chamber of Commerce have already voiced their concerns. This could lead tech firms to store data outside of Hong Kong.
Hong Kong’s national security laws of 2020 and 2024 will effectively preclude the return of major protests of the kind seen in 2019. Protesting is now effectively illegal in Hong Kong, and any future anti-government mobilization will be met with swift police action and prosecution.
Increasing polarization in Taiwan is leading to a hardening of political attitudes. The main opposition Kuomintang party is attempting to curtail the powers of the president. The ruling party is pushing back with legal actions and public campaigns. Large public protests have taken place. Clashes between supporters of the two camps are not entirely unlikely.
Taiwan has no known terrorist threat, either indigenous or from overseas. Were tensions with China to reach a crisis level, sabotage and terrorist-style attacks by Chinese operatives are highly plausible.
In Hong Kong there is a very minor risk of small-scale terrorist attacks on government targets by radicalized opposition activists. Seven defendants are currently being tried on terrorism charges related to the 2019 protest movement. Terrorism charges are likely to be used as a political weapon against government opponents.
The sanctions risk in Taiwan relates entirely to China, which has shown its willingness to use trade relations to punish both Taiwan itself and countries that express support for its autonomy.
The U.S. administration has revoked Hong Kong’s special trade status and expanded targeted sanctions on senior officials. Hong Kong’s economy depends on international trade and on the financial sector, which in turn depends on the free movement of capital. This, along with its small size, means Hong Kong’s government is not in a strong position to impose sanctions or capital controls on a large scale.
Taiwan’s fiscal position is strong, with public debt around 30% of GDP. Foreign exchange reserves are among the highest in the world at more than $570 billion. Hong Kong meanwhile has almost no public debt, and its currency is fully backed by foreign exchange reserves under a currency board system.
There is nothing to suggest that government entities in Taiwan would, nor easily could, withhold payment from creditors for political reasons. Hong Kong might plausibly do so if it adopts mainland China’s Anti-Foreign-Sanctions Law. Such counter-sanctions are likely to be employed conservatively if at all and imposed in a tit-for-tat rather than escalatory manner.
