In the Media

After three months of protests, Hong Kong’s Chief Executive Carrie Lam finally announced the withdrawal of a controversial bill that could allow for the extradition of individuals to mainland China. Although the proposed law was the original impetus for over a million Hong Kong residents taking to the streets, the protests have expanded in scope, with protesters also demanding an inquiry into police use of force, amnesty for arrested protestors, retraction of being labeled as “rioters”, and universal suffrage. More fundamentally, the protests have evolved into a broader expression of discontent with China’s governance of Hong Kong under the one country, two systems framework. The demonstrations are set to continue for the foreseeable future.

The resulting tensions between Hong Kong and mainland China pose considerable challenges for businesses operating in the region, especially around their business development, talent retention, and leadership. In order to manage these challenges, leaders need to understand the context around the protests and what they mean for business. Here are a few main issues to think about:

Inequality and pessimism about the future

Since the 1997 handover that returned Hong Kong to China from British rule, all major protests in the region have been driven by concern over the mainland’s influence in Hong Kong. For example, hundreds of thousands of protesters marched in 2003 after a national security law was proposed, which would have made it harder to express anti-China views (the law was indefinitely postponed). Large-scale protests erupted again in 2012, when thousands objected to implementing a pro-China national education curriculum in public schools, leading to the policy’s withdrawal. This was followed by 2014’s Occupy Central protests, often referred to as the Umbrella Revolution, which ran for almost three months, as protesters unsuccessfully sought universal suffrage in electing Hong Kong’s Chief Executive.

While rule of law concerns catalyzed past and present protests, socio-economic issues have more recently emerged as another driver of dissatisfaction, especially for young people. People are angry about Hong Kong’s stark economic inequality, obstacles to social mobility, extreme competition in school and work, and exorbitant housing prices – all of which contribute to an increasingly pessimistic view about the future.

Unfortunately, none of this is a surprise to me, as I see this pessimism reflected among my students at the University of Hong Kong. Most of the undergraduates I teach were born around the time of Hong Kong’s handover, and from a young age, they were told to study hard in order to enter a top secondary school, and to study harder to gain admission to an elite university, after which they would be able to secure good employment and enjoy a successful life and home ownership. But for many, this vision seems more out of reach today. One survey found that almost 60% of respondents felt that career development opportunities for young people in Hong Kong were worse compared to their parents’ generation.

Part of the problem is Hong Kong’s inequality. Hong Kong’s Gini coefficient is over .5, branding it as one of the most unequal societies in the developed world. (By comparison, the Gini coefficient for the United States is .39 and Japan is .34, according to the OECD.) Such inequality leads to a variety of issues including delayed access to healthcare, increased mental health issues, and reduced career opportunities, with one study finding that the median monthly salary for university graduates today is less than it was in 1987.

This inequality is most visible when examining home ownership. Property prices in Hong Kong have so outstripped the income of normal people that home ownership is a monumental challenge. Upon graduating, most of my undergraduate business students will have a starting salary of between USD 1,900-3,000 a month, while the average home price in Hong Kong is USD 1.2m. With financing terms generally more restrictive in Hong Kong than in the United States, it would take most of my students at least two decades to save up enough money to make a down payment on a home, and this is with the assumption that home prices don’t increase during that time. In a society which only introduced a minimum wage in 2011 (of currently around USD 4.80 an hour), life is even more challenging for non-university educated workers.

Chief Executive Lam has recognized these issues. When announcing the withdrawal of the bill, she acknowledged that “…discontentment extends far beyond the Bill. It covers political, economic, and social issues, including the oft-mentioned problems relating to housing and land supply, income distribution, social justice and mobility, and opportunities for our young people.” Effectively addressing these issues will take considerable time, but it is the collective responsibility of both Hong Kong’s public and private sector, which are closely linked, to prioritize them and work to restore stability to the region.

Hong Kong’s consolidation into China

Hong Kong’s economy grew rapidly during the latter part of the 20^th century, so much so that it represented over 18% of China’s GDP in 1997. With China’s rapid economic rise over the last two decades, however, Hong Kong’s economic strength relative to the rest of China has receded, making it now roughly similar in economic clout to neighboring cities like Shenzhen or Guangzhou.

Undoubtedly, Hong Kong still serves as a conduit for China business due to its relatively strong rule of law and robust capital markets, but there is a risk that its uniqueness may diminish as it becomes more integrated into China. Initiatives like the Greater Bay Area, unveiled by China earlier this year to link Hong Kong, Macau, and neighboring Chinese cities into an economic ecosystem surpassing Silicon Valley, will only continue to draw Hong Kong closer to China.

This issue of consolidation is certainly on the minds of protesters. When Hong Kong was returned to mainland China, it was promised 50 years of autonomy through the one country, two systems framework, which formally comes to an end in 2047. The year 2047 has always loomed large in Hong Kong’s future, with many harboring hopes that by then China will have grown to resemble Hong Kong in terms of social and political freedoms. At this juncture, however, that future seems unlikely.

Businesses are being pulled into the chaos

The protests have taken a significant toll on business in Hong Kong. Many of Hong Kong’s largest companies generate much of their revenue from the Chinese market, which requires them to walk a delicate line between stakeholders in Hong Kong and mainland China. And keenly aware of its economic leverage, Beijing has exerted pressure on Hong Kong’s business establishment. For example, in early August it assembled nearly 500 of Hong Kong’s business and political elite in Shenzhen to provide guidance on how to support the government in the midst of the ongoing protests.

Perhaps the most explicit intervention was the Civil Aviation Administration of China banning employees of the Hong Kong based Cathay Pacific airlines who had engaged in protests from serving on China flights or even traveling through its airspace. In the wake of the furor, both Cathay Pacific’s CEO Rupert Hogg and its Chairman John Slosar resigned, and the airline cut routes after a 38% decline of inbound passengers. This impact on Cathay Pacific is not unique. Most consumer-oriented sectors like travel, tourism, hotel, retail, and restaurants have been hit incredibly hard due to the decline of mainland visitors and muted local consumption.

Hong Kong’s capital markets have also been impacted. Normally, one of the world’s top IPO markets, a number of companies have decided to postpone or otherwise change their listing plans due to the recent protests. Most noticeably, Alibaba postponed its Hong Kong offering until the political climate settles. Additionally, Fitch Ratings, the credit rating agency, slightly downgraded Hong Kong based on recent events and the prospect that Hong Kong’s “continued integration into China’s national governance system, which will present greater institutional and regulatory challenges over time.” Even though the impact of such a downgrade is more symbolic than financial, due to Hong Kong’s high credit rating, it casts another shadow over the long-term viability of Hong Kong’s unique status as a financial hub.

On top of operational, strategic, and financing disruptions, one of the unintended consequences of the protests are the impact they may have on companies in attracting and retaining talent. If the underlying causes of the protests are not addressed and it becomes even harder to do business, many people may simply choose to leave Hong Kong. It is already reported that immigration services and movers are the busiest they’ve been in years. Consequently, it may prove difficult for businesses to sustain the human capital needs they require in Hong Kong, which may further reduce Hong Kong’s attractiveness as a hub for international business, perhaps opening the door for another city in Asia to emerge as a global economic center.

What leaders need to do

The protests show no signs of ceasing. With Chinese National Day on October 1st, commemorating the 70th anniversary of the founding of modern China, it is expected that protesters will use the occasion to press for their remaining demands and voice their displeasure regarding the mainland’s influence in Hong Kong. In November, Hong Kong will hold District Council elections, which will be defined by the increase in young registered voters dissatisfied with the extradition bill and the government’s lack of leadership during the crisis. As the first elections since the protests commenced, the results will serve as a litmus test for Chief Executive Lam’s government and additional demonstrations are possible.

In the face of such political unrest, leadership is paramount. Political volatility seems to be the new norm globally, and business leaders need to account for the risks in their strategic planning. Political issues seemingly unrelated to one’s business can quickly metastasize into a significant issue like it did for Cathay Pacific.

It’s clear that leaders and organizations are going to face tough decisions in such an operating environment, so a clear sense of values is needed to guide decision-making when there may not be a clear right or wrong choice. For example, does an organization’s values dictate supporting the freedom of expression of its employees in their private lives, or conforming to stricter requirements on speech that are imposed in certain markets? Having a clear sense of values and purpose can help guide a leader through such dilemmas.

Leaders also need to be cognizant that long-term, large-scale political unrest causes a certain level of fatigue even for those not directly involved. Keeping a pulse on organizational morale and energy – by listening to your people – is critical both during periods of protest but even for some time after protests have waned. Reestablishing the connective tissue and trust of a fractured society takes time.