Hong Kong and Taiwan
Index trend
Previous Quarterly Editions
Expropriation Risk: HK: 51 51 51 51 ► T: 38 38 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: 15 15 15 15 ►
Overall Risk Temperature HK: 32 (Low) TREND ►Overall Risk Temperature T: 29 (Low) TREND ►
Special topic: Political polarization
Taiwan has experienced relatively high levels of polarization within its multi-party democratic system. Two factors are driving this, both related to Taiwan’s unsettled relationship with mainland China.
First, one political camp, the ‘pan-blue coalition’ led by the Kuomintang (KMT), originated in mainland China and ruled Taiwan as a dictatorship until 1987. The opposition camp, the ‘pan-green alliance’ led by the Democratic Progressive Party (DPP), was once outlawed under the KMT’s one-party rule. Suspicion of the KMT lingers, despite its subsequent reform and transformation into a democratic party.
The second major factor driving political polarization is sovereignty aspirations. The DPP, which currently holds the presidency, would like to gain international recognition for Taiwan’s de facto independence and achieve a permanent legal separation from China through constitutional changes. The KMT would prefer better relations with mainland China and a de-militarization of the dispute with Beijing over Taiwan’s future, pointing to China’s role as the largest market for Taiwan’s export-driven economy and to the linguistic and cultural ties between the two societies.
Recent polling by the Election Study Center, National Chengchi University, indicates that more than three-quarters of the public wants to maintain the status quo or move toward independence, while around 1% wants unification with China. Since the sovereignty question is central to Taiwan’s presidential elections, the DPP has won the last three and held power since 2016. The KMT is simply not trusted to protect Taiwan’s hard-won democratic system.
However, the KMT controls the majority of local political offices across Taiwan and in the 2024 parliamentary elections secured one more seat than the DPP. The KMT has sought to use this majority to curb the powers of the president, especially by shifting funds to localities controlled by the opposition. Opposition legislators have also stripped some funding from the defense budget.
The result of this parliamentary challenge to the presidential office has been a significant uptick in polarization and street protests against the KMT. However, while bitter feelings do exist among the supporters of both camps, politicians are considerably more polarized than the general public.
Political polarization in Hong Kong came to a head in 2019–2020 with a series of pro-democracy protests that shut down much of the city and involved frequent, violent clashes with police. Driving this polarization was the question of Beijing’s role in Hong Kong’s political life and the desire by the pro-democracy camp to adopt direct popular elections for Hong Kong’s chief executive, its highest political office. Hong Kong was not allowed direct elections for the chief executive under U.K. rule or subsequently by Beijing.
The 2019 protests were followed by arrests of media figures, protest leaders, religious figures and many others. More worrying for the pro-democracy camp was the adoption in 2020 of a national security law that effectively outlawed public protests. Pro-democracy lawmakers were largely removed from the legislature after refusing to take a new oath of office pledging fealty to Beijing.
Polarization between the pro-democracy camp and the pro-China camp is vitriolic, ideological and passionate. The democracy question, however, has largely been settled by China’s crackdown. The most prominent activists have been prosecuted or fled. The pro-democracy movement has become dormant and is likely to remain so unless political change arrives first in Beijing.
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Openness to foreign investment is part of Taiwan’s campaign for political independence. Foreign direct investment is seen as crucial to national security, and the U.S. — Taiwan’s de facto security guarantor — is its second-largest foreign investor. Taipei is also eager for investments in IT and biotechnology in order to upgrade its economy; therefore, there is little likelihood of expropriation of foreign assets. Taiwan will continue to provide a stable legal environment for foreign investors.
While Hong Kong's government recognizes that foreign business is central to the city’s economy, certain initiatives are undermining confidence in the business environment. In August 2024, the government proposed a new cybersecurity law that raised alarm bells about the protection of proprietary data among foreign firms. Google, Amazon, Meta and the American Chamber of Commerce have voiced concerns. In 2024, the U.S. Department of Commerce also issued a warning over greater risks to U.S. businesses arising from Beijing’s increased control over Hong Kong.
Increasing polarization in Taiwan is hardening political attitudes. The main opposition parties’ diversion of funds away from the central government to local governments, and their attempts to curb the power of the president, have sparked street protests. The highly emotional state of Taiwan’s public life is likely to lead to more protests and quite possibly limited clashes between supporters of the government and opposition groups.
In Hong Kong, meanwhile, the national security laws of 2020 and 2024 effectively preclude the return of widespread pro-democracy activism. Protesting is now illegal and any future anti-government activities will be met with swift police action and prosecution. Should protests break out, however, they would likely be considerably more violent than those of 2019.
China is Taiwan’s sole source of national security threats. No transnational or domestic terrorist groups present a threat to Taiwan’s security. Sabotage by mainland Chinese operatives is possible during a serious cross-Strait crisis, but the terrorist threat is negligible.
Hong Kong’s most prominent terrorism case arose from the anti-government protests of 2019. In the future, terrorism charges are likely to be used, if at all, as a political weapon against government opponents. It is not implausible, however, that anti-government activists could use terrorism to disrupt transportation and government functions to draw attention to their cause.
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 Trump administration has maintained its predecessor’s revocation of 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 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.
In March this year, the Trump administration doubled tariffs on Chinese imports to 20%, and Beijing has adopted retaliatory tariffs on U.S. goods. The trade war will add costs and introduce uncertainty for businesses operating in Hong Kong, especially those engaged in the transshipment of goods between China and the U.S.
Taiwan’s fiscal position is strong, with public debt around 29% of GDP. Foreign exchange reserves are among the highest in the world and as of January 2025 reached a high of more than $577.6 billion. For its part, Hong Kong 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 retaliatory sanctions are likely to be employed conservatively if at all and imposed in a tit-for-tat rather than escalatory manner.
