China Brief: 28 May – 3 June 2019

A2 Global’s China Brief contains assessments of events and policies that may impact commercial interests, personnel, and assets throughout Greater China. This edition looks into developments concerning Hong Kong’s extradition law, a pharma group’s accounting scandal, and the US-China trade war, among other subjects.

Taiwan – Travel risk: Low – Cabin crew protest in capital tomorrow, heightening transport disruption risk

China & Hong Kong – Heightened security likely for Tiananmen anniversary, raising travel risk

Hong Kong – Political risk: Minor – Concessions to extradition bill fail to convince critics

China & United States – Beijing tariff hikes on US goods come into effect

China – Corruption risk: Extreme – Pharma group accounting scandal highlights investment risks

Hong Kong – Political risk: Minor – Extradition legislation may compromise bilateral ties

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Taiwan – Cabin crew protest in capital tomorrow, heightening transport disruption risk

TAIWAN – Travel risk: Low

4 June: Members of the TFAU flight attendants union at Taiwanese international airline EVA Air – the second-largest Taiwanese carrier – are planning to protest in the capital Taipei over pay, management, and working hours. On 6 June, members will vote on whether to hold a strike.

Why it matters: A2 Global advises business travellers in Taipei to avoid protests as a precaution, monitor the situation for updates, and allow for additional time for travel – including to Taiwan Taoyuan International Airport (TPE) – due to likely transport disruption. Travellers with flights from airports in the capital should re-confirm their flight status prior to departure.

China & Hong Kong – Heightened security likely for Tiananmen anniversary, raising travel risk

4 June: 4 June is the 30th anniversary of the 1989 Tiananmen Square protests.

Why it matters: The Tiananmen Square protests were marked by a violent military crackdown on 4 June, 1989, which drew international condemnation. On 4 June, an annual candlelight vigil in Hong Kong commemorating the crackdown is expected to attract tens of thousands of people. Heightened security measures are likely in the one-week outlook, especially in Hong Kong and at major mainland urban centres, such as the capital Beijing. Increased social media monitoring and censorship are also likely. A2 Global advises business travellers to allow for additional journey time – including to airports such as Beijing Capital International Airport (PEK) and Hong Kong International Airport (HKG) – due to likely transport disruption and additional airport security checks. Foreign staff should avoid discussing politically sensitive issues around the anniversary, due to increased political risk and the likelihood of conflicts with some Chinese personnel or business partners. Caution is also advised regarding private and public messaging on social media and telecommunications services, which will also likely be subject to a heightened risk of surveillance or interception.

Hong Kong – Concessions to extradition bill fail to convince critics

HONG KONG – Political risk: Minor

30 May: Hong Kong’s Security Secretary John Lee Ka-chiu said that a proposed bill allowing the extradition of criminal suspects to China had been amended following widespread local and international opposition. Lee said only suspects facing serious crimes with a minimum seven-year sentence would be eligible for extradition to China. While the territory’s main local business groups welcomed the concessions, the legal profession, opposition legislators, and the UK and Canadian governments rejected the amended bill as it offered no guarantee of fair treatment for suspects and exposed foreign nationals to the risk of extradition.

Why it matters: A2 Global warns that the strength of local opposition to the proposed bill will be evident by the size of protests planned for 9 June. China can be expected to respond with vigour to what it will perceive as a direct challenge to Beijing’s authority in Hong Kong. Such actions are likely to increase pressure on Hong Kong’s local administration and those countries opposed to its right to directly interfere in the territory’s legal, social, and political systems. Companies operating in Hong Kong should prepare for a protracted period of uncertainty and potential unrest.

China & United States – Beijing tariff hikes on US goods come into effect

1 June: Five to 25 per cent tariff increases imposed by Beijing on 5,410 US goods worth USD60 million came into effect. The products targeted in the 25 per cent tariff hikes include wood, musical instruments, fabric, sports equipment, tires, kitchenware, diamonds, cosmetics, condoms, and heavy alcohol such as tequila, wine, and gin.

Why it matters: Beijing imposed the tariffs on 13 May. This followed the US imposition of tariffs on USD200bn worth of Chinese goods that came into effect on 10 May, and likely constitutes retaliatory tariffs in the ongoing trade war between the two countries. A2 Global advises businesses to assess how the tariffs will impact operations and factor higher prices into their purchasing strategies. Logistics managers sourcing the targeted US products should assess the impact of the tariffs on their supply chain, and, if necessary, seek alternative suppliers.

China – Pharma group accounting scandal highlights investment risks

CHINA – Corruption risk: Extreme

29 May: Chinese pharmaceutical company Kangmei Pharmaceutical Co., Ltd (Kangmei) admitted it used false documents to overstate its cash balance by RMB30 billion (USD4.4bn). This has led its shares to drop by 4 per cent.

Why it matters: Kangmei – which is on the MSCI Emerging Markets index – has been embroiled in a major accounting scandal since April 2019, when it disclosed several significant errors in its 2017 annual report. It subsequently revised down its operating revenues for that year by RMB8.9bn (USD1.3bn). The MSCI introduced the shares of several hundred Chinese companies into its index in 2018, and China’s weighting in the index is likely to increase from less than 1 per cent to 3.3 per cent by the end of 2019.

In March 2019, the Hong Kong securities regulator froze the shares of China Ding Yi Feng Holdings, another company on the MSCI index, over alleged market manipulation. The disclosures indicate a higher-than-expected investment risk when investing in China via the index, as well as highlighting corruption risks associated with businesses in the country. In order to avoid reputational damage and potential financial losses, businesses are advised to conduct third-party due diligence before making investments.

Hong Kong – Extradition legislation may compromise bilateral ties

HONG KONG – Political risk: Minor

27 May: Media reported that locally-based diplomats from a number of foreign countries have warned that their governments are reviewing bilateral agreements with Hong Kong, due to plans to permit the extradition of criminal suspects to China. Legal opinion notes that suspects of any nationality could be extradited to China on the basis of evidence that would fail the meet Hong Kong’s own legal standards. The same day, the influential Hong Kong General Chamber of Commerce called for increased legal safeguards to protect the rights of suspects sought by the Chinese authorities.

Why it matters: A2 Global warns that the extradition issue has become a key test of the local administration’s willingness and ability to counter Beijing’s efforts to tie the territory closer to China’s legal and political systems. Present indications are that Beijing will prevail and Hong Kong’s limited autonomy will be further eroded. This outcome would have serious and long-lasting consequences for the territory’s business community, economy and investment climate, including a surge in the departure of foreign and domestic companies and individuals, capital flight, and the increased threat of social instability.

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