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Expropriation Risk: 38 38 38 38 Political Violence Risk: 48 48 48 48 Terrorism Risk: 15 15 15 15 Exchange Transfer and Trade Sanction Risk: 13 13 13 13 Sovereign Default Risk: 15 15 15 15
Expropriation Risk: 38 38 38 38 Political Violence Risk: 35 35 35 35 Terrorism Risk: 15 15 15 15 Exchange Transfer and Trade Sanction Risk: 13 13 13 13 Sovereign Default Risk: 15 15 15 15
TREND ►
Sweeping reforms of Hong Kong’s electoral system enacted by Beijing in March 2021 are the most significant change to the city’s political system since its handover to China in 1997. They reduce popular representation in the legislature and give Beijing a more direct say in the selection of legislators and the city’s top official, the chief executive. The next Legislative Council, to be elected in September 2021, will include almost no members of the current opposition. It will be far more unified in its approval of the central government and Chinese Communist Party, though there may still be contested politics regarding economic policy.
Beijing appears to blame popular discontent in Hong Kong on economic problems, such as high housing costs, inequality and poor social mobility. The new cohort of pro-Beijing leaders that will take over under the new electoral system is likely to be less attached to the city’s famous 'low-tax, low-spending, low-regulation' economic model. This could mean more large infrastructure and housing projects and more interventions in the economy to control costs.
The UK government, in response to Chinese moves it says violate the terms of Hong Kong’s handover, launched a scheme in January 2021 that makes millions of Hongkongers eligible to move to the United Kingdom and eventually become citizens. The scale of migration could be significant, though it will depend on the strength of the UK economy as much as repression in Hong Kong. The departure of engaged citizens and legal professionals will weaken Hong Kong’s civil society and institutions, particularly since newcomers from mainland China will probably move in to replace them.
Meanwhile, events in Hong Kong over the past two years have strengthened anti-China sentiment in nearby Taiwan, and with it, popular support for President Tsai Ing-wen, whose independence-leaning Democratic Progressive Party also controls the legislature. Cross-Strait relations have been cold since she took office and there is scant prospect of improvement until she steps down in 2024. Even the traditionally China-friendly main opposition party, the Kuomintang, has been forced to adopt a more China-sceptic position, in effect moving the centre ground in Taiwanese politics away from cooperation with Beijing.
Chinese military aircraft have begun frequent incursions into Taiwan’s air defence identification zone, along with naval exercises in nearby seas, to intimidate Taiwan and undermine its morale. Taiwan is seeking, and receiving, stronger support from Washington: the Biden administration sent a strong signal from the outset by inviting Taiwan’s de facto ambassador in Washington to attend the presidential inauguration, an unprecedented move. It has also upheld a last-minute decision by the Trump administration to remove restrictions on meetings between US and Taiwanese officials.
Taiwan’s importance to global supply chains has come into focus as carmakers in Europe, Japan and North America struggle with a shortage of semiconductor chips that forced them to slow down or suspend production. Taiwan is the world’s largest manufacturer of semiconductors; its largest firm, TSMC, holds around 50% of the world market by itself.
Taipei has promised to assist its fellow liberal democracies by working with the country’s chipmakers to help ease the shortage- no doubt in expectation of support for Taiwan’s autonomy from China- but is also dealing with the worst drought in decades, which poses a direct threat to production in the water-intensive chipmaking sector.
Early and decisive measures to stop COVID-19 have kept total cases below 1,000 and allowed Taiwan to avoid the disruptive lockdowns seen in most other developed countries. Taiwan achieved 3.1% gross domestic product (GDP) growth last year and forecasts for this year come in at around 4.5%. Vaccinations began only in late March 2021 but are arguably less urgent than in countries where COVID-19 has spread uncontrollably.
Hong Kong has fared less well. It has had nearly 12,000 COVID-19 infections and strict social distancing rules forced many businesses to close. Plans for mass vaccination using a mainland Chinese Sinovac vaccine initially faced resistance from a public suspicious of China in general and sceptical of the vaccine’s safety and effectiveness.
GDP fell 6.1% last year, hit by successive lockdowns and restrictions on cross-border travel, taking unemployment to a 16-year high of 6.6%. This is the second consecutive year of economic contraction, after the protest movement in 2019 led to a 1.2% decline. Renewed growth is expected this year, but not enough to return output to its pre-protest level.
There is nothing to suggest significant risk of either Taiwan’s or Hong Kong’s governments expropriating foreign assets, though the possibility is less implausible in Hong Kong due to Beijing’s ability to direct decisions behind the scenes. Taiwan is a politically stable liberal democracy with robust rule of law. Hong Kong is increasingly authoritarian, but this is gradual and focuses specifically on crushing anti-Chinese political activism; the courts can and do still rule against the government, and the government is sensitive to the fact that foreign business is crucial to the city’s economic viability and would not take the risk of alarming investors by expropriating foreign property.
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 extreme members arrested. New legislation has been passed to prevent a repeat. Many of the less-committed protesters will be deterred from further activism. Another round of protests cannot be ruled out as COVID-19 recedes, but they are unlikely to resume with anything like the level of disruption and destruction seen in 2019.
Taiwan is a stable liberal democracy. In 2014, a short-lived student protest movement against a trade deal with China, known as the Sunflower Movement, caused disruption in the capital with large mass gathering and scuffles with police, and briefly occupied the legislature. With the ‘anti-China’ party now in power, there is no cause likely to trigger a repeat. However, political engagement is high and protest rallies about various issues are not uncommon. It is possible that a controversial issue- probably related to China- could galvanise another mass movement, but it would probably be localised, brief and largely peaceful.
Taiwan has no known terrorist threat, either indigenous or from overseas. If tensions with China were to reach a crisis level, sabotage by Chinese operatives is plausible.
The 2019 Hong Kong protests saw numerous arson attacks against government buildings and businesses deemed ‘pro-China’, along with frequent assaults on police officers. However, these incidents were specific to the context of the protests and have now subsided.
There have been a handful of arrests in the past few years of people alleged to have been planning bombings or the use of firearms. There have been no successful attacks of any significant scale, but the possibility cannot be ruled out, particularly now that legislation has criminalised many options for peaceful protest and excluded activists from the formal political system.
Lack of other options could drive some radical activists to increasingly desperate measures. Any attack would almost certainly target government buildings or personnel and would probably be small and unsophisticated, given the perpetrators’ likely lack of experience.
TREND ►
The Biden administration is maintaining its predecessor’s revocation of Hong Kong’s special treatment as a separate economy from China, with regard to bilateral trade and expanding targeted sanctions on a small number of senior officials.
Hong Kong’s economy depends on international trade and on the financial sector, which in turn depends on the free flow of capital. This, along with its small size, means its government is not in a strong position to impose sanctions or capital controls.
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 30% of GDP. Foreign exchange reserves are among the highest in the world and are now at a record high of more than USD540bn. 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 either Taiwan or Hong Kong would, nor easily could, withhold payment from creditors for political reasons.
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