November 13, 2019 / 7:05 AM / 24 days ago

Breakingviews - Volatile Hong Kong poses a supply-chain quandary

An injured photographer and first aid react from tear gas during a standoff with riot police at the Chinese University of Hong Kong, Hong Kong, China November 12, 2019. REUTERS/Tyrone Siu

HONG KONG(Reuters Breakingviews) - The corporate calculus on Hong Kong is changing. For a third consecutive weekday, transport networks have been disrupted by violent anti-government protests, prompting schools to close and leaving workers stranded. Much the way toymakers and apparel vendors have accelerated their quest for factories outside China, its special administrative region poses an international supply-chain quandary.

Hong Kong boasts an admirable track record of surviving shocks, from regular typhoons to the SARS epidemic. Five months of demonstrations this year, however, present an unprecedented challenge. A day after police shot a protester at close range, college students battled law enforcement in a prolonged and fiery standoff. Tear gas was fired in the crowded central business district at lunchtime.

The unrest has exposed a government, led by Carrie Lam, and a police force ill-equipped to cope. A police spokesman saying the city’s rule of law has been pushed “to the brink of total collapse” can only prompt multinational companies to accelerate contingency planning. More than 1,500 of them, with nearly 200,000 employees, have stationed their regional headquarters in Hong Kong, in large part because of the city’s robust rule of law.

So far, there have only been small signs of financial capital flight. Bigger changes are becoming inevitable, though.

Human capital will be a real challenge. Banks, consultants and others in the services industry will struggle to entice Western executives to move to a volatile Hong Kong. Likewise, violence being directed at the city’s mainland Chinese residents is bound to dissuade southbound relocations. And many Hong Kongers themselves will seek an escape hatch. It has happened before: About 300,000 of them were living in Canada in the late 1990s, around the time of the British handover.

Nearly half of companies surveyed by the American Chamber of Commerce in Hong Kong said they were pessimistic about business prospects longer-term. More than a third reported wrestling with a possible talent drain and a quarter indicated plans to scale back or move away. And that was over a month ago, before the latest escalation. Finding a different hub will be difficult, especially for those that need proximity to the influential stock exchange, depend on Hong Kong as a gateway to the mainland or relish an independent judiciary. Each day of fresh violence, however, makes alternatives look better.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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