Index trend
Previous Quarterly Editions
Expropriation Risk: HK: 51 51 51 51 ► T: 40 40 40 40 ►Political Violence Risk:HK: 48 48 48 48 ► T: 48 48 48 48 ►Terrorism Risk:HK: 12 10 10 10 ► T: 12 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 26 26 ►
Overall Risk Temperature HK: 32 (Low) TREND ►Overall Risk Temperature T: 32 (Low) TREND ►
Special topic: Relationship with the 'global rules-based order'
Taiwan aspires to full membership in the international order and eventual recognition as a sovereign state. In the meantime, it is an active supporter of international norms in a host of areas, from aviation to terrorism and trade. It cooperates with international organizations on a voluntary basis in lieu of formal membership.
Taiwan is a major stakeholder in the liberal international order. It is democratic and highly reliant on safe trade routes for its export-driven economy. Economically it plays an outsized role in high-tech exports and is the largest producer of advanced semiconductors.
Taiwan holds the unique, and unenviable, position of being a de facto sovereign democracy while being shut out of international organizations that require statehood for membership, most notably the United Nations and its various bodies (though Taiwan is a member economy of the World Trade Organization). Taiwan is recognized by only 11 countries and the Vatican. Yet its most important external relations are with the U.S., Japan and the democracies of Western Europe, none of which recognize Taiwan’s sovereignty but all of which hold an interest in keeping Taiwan in the liberal international order.
The liberal international order may be Taiwan’s best hope for its national security. China, which would like to end Taiwan’s de facto sovereignty, has so far been prevented from doing so by the risk of courting conflict with the U.S. and Japan and upending the uneasy peace in East Asia.
Hong Kong’s external affairs are controlled exclusively by Beijing. Hong Kong’s role in international norms, therefore, is negligible. China, however, seeks to actively reshape the international order to its own advantage.
Internally, Hong Kong has been retreating from liberal-democratic norms. A Beijing-backed national security law in 2020 lays out penalties for secession, subversion, terrorism and colluding with a foreign government. The law was later used to prosecute pro-democracy activists, publishers and others deemed to have run afoul of a law broadly written. It had a chilling effect on civil liberties in Hong Kong. As of December 2023, it had a 100% conviction rate.
In March 2024, a second national security law was passed to give the government even wider powers to prosecute political opponents. This resulted in the disbanding of some opposition groups and the fleeing or prosecution of activists. The national security laws are seen as a major assault on judicial independence, press freedoms, and rights to speech and assembly.
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Nothing suggests a significant risk of Taiwan’s government expropriating foreign assets. Taiwan is a politically stable liberal democracy with robust rule of law. Moreover, Taipei courts foreign investment and has long hoped to make Taiwan attractive to foreign businesses and entrepreneurs.
For its part, Hong Kong's government recognizes that foreign business is central to the city’s economy and would not want to alarm investors by expropriating foreign property. There were initially fears that the Anti-Foreign Sanctions Law passed in mainland China would be extended to Hong Kong. The law authorizes the government to seize assets of individuals and organizations that participate in sanctions against China.
However, China did not impose the law on Hong Kong and does not appear poised to do so. A risk remains, however, that China’s increasing assertiveness regarding the West will erode confidence in Hong Kong as a gateway to the China market and the rest of East Asia.
The protest movement that disrupted business, transport and air travel in Hong Kong for much of 2019 has been crushed, and its leaders and most active members have been arrested and prosecuted under national security laws. National security laws adopted in 2020 and early 2024 have made protesting increasingly risky. Many of the less-committed protesters will be deterred from further activism.
Another round of protests at some point cannot be ruled out, but they are unlikely to approach the same level of disruption and destruction. Indeed, many pro-democracy activists have moved overseas.
Taiwan, meanwhile, is a stable liberal democracy. Political engagement is high, however, and protest rallies about various issues are not uncommon. It is possible that a controversial issue, probably relating to China, could galvanize another mass movement, but it would most likely be localized, brief and largely peaceful.
Taiwan has no known terrorist threat, either indigenous or from overseas. Were tensions with China to reach a crisis level, sabotage by Chinese operatives is likely.
In Hong Kong, the authorities have dismantled the organizational structures that have mobilized and channeled political opposition to the government. This could make some activists more susceptible to radicalization.
There is a small risk of lone-wolf or small-scale, organized attacks. These would probably be unsophisticated, given the perpetrators’ likely inexperience. Government facilities and personnel would be the preferred targets, but more accessible infrastructure and businesses perceived as pro-China are possibilities.
The U.S. government has revoked Hong Kong’s erstwhile special trade status and placed 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 capital flow. 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. If mainland China's Anti-Foreign Sanctions Law is extended to Hong Kong, tit-for-tat targeted sanctions would be possible.
The sanctions risk in Taiwan, meanwhile, relates entirely to China. Political tension poses an ever-present threat to cross-Strait trade. Beijing has a record of using undeclared, de facto trade sanctions to try to coerce other governments, including Taiwan’s, and can implement them quickly and without warning.
Taiwan’s fiscal position is strong, with public debt around 22% of GDP and falling. Foreign exchange reserves are among the highest in the world at $569.4 billion as of February 2024, marginally down from their all-time high of $570.65 billion in December 2023.
Hong Kong, meanwhile, has almost no public debt, and its currency is fully backed by foreign exchange reserves under its currency board system.
Nothing suggests that government entities in Taiwan would, nor easily could, withhold payment from creditors for political reasons. Hong Kong might plausibly do so if it eventually adopts mainland China’s Anti-Foreign Sanctions Law. Such countersanctions are likely to be employed conservatively, if at all, and imposed in a tit-for-tat rather than escalatory manner.
