Previous Quarterly Editions
Expropriation Risk: HK: 38 38 40 39 ▼ T: 40 38 40 39 ▼Political Violence Risk:HK:48 48 48 48 ► T: 35 35 35 35 ►Terrorism Risk:HK:15 15 15 15 ► T: 15 15 15 15 ►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 ►
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Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Geopolitical alignmentWeakest 1 2 3 4 5 Strongest
Taiwan maintains official diplomatic relations with 13 nations, mostly in the Pacific islands and Latin America, and the Holy See. Geopolitically, it is strongly aligned with the U.S., with relations with Washington of singular importance in balancing against China’s long-standing goal to curb Taiwan’s self-governance. Although Washington does not officially recognise Taiwan, it is required by U.S. law via the Taiwan Relations Act to arm Taiwan for defensive purposes, thus tying U.S. credibility to Taiwan’s defence.
U.S. support for Taiwan is currently at a high-water mark in the history of the unofficial relationship. Taiwan’s political leaders are enjoying unprecedented access to the U.S. government. Moreover, the deterioration of U.S./China
relations and a renewed geopolitical focus on the competition between authoritarian and democratic governance has been to Taiwan’s benefit.
The support, moreover, is being expressed both by the U.S. government’s executive and legislative branches. Much was made of the perceived rift between the White House and Congress when Speaker Nancy Pelosi visited Taiwan in August, with some speculation that the White House disapproved out of concern for Chinese sensibilities. Although the visit sparked days of Chinese military exercises in waters surrounding Taiwan, there is no reason to view the Biden administration as any less supportive of Taiwan.
Taiwan has also been pressing for closer relations with Japan to help counter the China threat. Taipei aligns itself strongly with fellow democracies in Asia and the West and has been trying to de-leverage its economic reliance on China, which is the largest market for its exports, to align its trade policy with its pro-democratic foreign relations.
Hong Kong, in contrast, is geopolitically subsumed within China’s sphere of influence. Geopolitics affects Hong Kong largely through debates over attempts to preserve or undermine the tenets of the Basic Law, the mini constitution that protects political rights in Hong Kong not enjoyed elsewhere in China. This law, negotiated between Beijing and London, was intended to protect civil liberties in Hong Kong until 2047. But the law is anathema to China’s system of governance and has thus been systematically undermined by Beijing. This includes a clampdown on press freedoms, judicial independence, and free speech.
While Hong Kong’s pro-democratic activists draw inspiration from Western democracies and Taiwan, it is solidly a locally driven phenomenon, despite Beijing’s attempts to characterise dissent as foreign plotting. Pro-democracy sentiment runs deep, and activists have pressed their goals through widespread protests and electoral manoeuvring, but they have largely failed in their competition with local pro-Beijing forces, which includes both the political and commercial establishment.
The debate was largely decided in favour of Beijing with the passage of a national security law in June 2020. The law makes much of the pro-democracy camp’s activities subject to prosecution. Since its passage, China has shown a willingness to quash dissent through prosecutions resulting in the imprisonment of pro-democracy politicians and activists, and even educators, with the people of Hong Kong having little influence over the direction of the territory’s geopolitical alignment.
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There is nothing to suggest 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.
Hong Kong's government recognises foreign business is central to the city’s economy and would not want to alarm investors by expropriating foreign property. There were initially fears the Anti-Foreign-Sanctions Law passed in mainland China would be extended to Hong Kong. The law authorises the government to seize assets of individuals and organisations that participate in sanctions against China.
However, China did not impose the law on Hong Kong, and does not appear poised to do so. There remains a risk, however, 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 extreme members arrested. 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 are now moving abroad.
Taiwan is a stable liberal democracy. However, political engagement is high and protest rallies about various issues are not uncommon. It is possible that a controversial issue, probably relating to China, could galvanise another mass movement, but it would most likely be localised, 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 plausible.
In Hong Kong, the authorities have dismantled the organisational structures that have mobilised and channelled political opposition to the government. This could make some activists more susceptible to radicalisation. There is a small risk of lone-wolf or small-scale, organised 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. 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 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 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 30% of GDP. Foreign exchange reserves are among the highest in the world and are now at a high of more than USD445.5 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 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.
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