On Aug. 14, 2019, the aviation world was stunned by Cathay Pacific CEO Rupert Hogg’s decision to step down amid protests in Hong Kong. Though not officially confirmed, it is apparent that the resignation was Beijing’s response to news that Cathay Pacific employees were participating in protests.
Hogg, the person instrumental in Cathay’s return to profitability, was forced to resign and in his place, Augustus Tang Kin-Wing was named chief executive. The new CEO immediately set to distance himself from his predecessor and stated that Cathay Pacific “must and will ensure 100 percent compliance” with Chinese government aviation demands.
It is said that John Slosar, chairman of Swire – the conglomerate owning 45 percent of Cathay Pacific, was summoned by Chinese officials and essentially strong-armed into forcing changes at Cathay to appease the government. Swire, with $13 billion in investments in mainland China immediately complied in order to avoid putting these mainland investments at risk.
China’s Way or the Highway
The Chinese government has made it very transparent that for foreign companies to operate in China and Hong Kong they must fall in line with the Communist Party world-view. Cathay Pacific served to be a prime example of that.
The behavior of the Chinese government should scare every multinational company in Hong Kong. The reason Hong Kong has become such a global hub is because of its strong rule of law, stable government and autonomy from the People’s Republic of China. British rule of the city as a colony saw Hong Kong sheltered from the communist rule of its neighbor until 1997 when the city was transferred back to China, will the full transition set to occur in 2047.
This was precisely the reason many foreign companies were against the extradition bill that started the protests in the first place. Enveloping Hong Kong’s legal system with the opaque detention centers and one-sided courts system that the Chinese government calls a legal system negates any benefits Hong Kong originally had.
International businesses have to face a new reality in Hong Kong, the “one country, two systems” rule which originally afforded Hong Kong political and legal freedoms not available on the Chinese mainland are now being eroded away. The protections that made Hong Kong a stable place to operate have been shaken. The region can now no longer be considered Hong Kong Special Administrative Region, China but just China.
Chinese President Xi Jinping’s administration has shown time over time that its main priority is maintaining control and now, it is clearly showing that it is increasing efforts to control foreign companies and conform to party rules if they want any chance of doing business in China. These actions create tremendous uncertainty about government intentions and are causing capital to leave Hong Kong in droves with many going to safer more stable places like Singapore.
Systemic Attack on Cathay Pacific
The attack on Cathay Pacific was shocking and swift. Chinese state media vocally denounced the company and social media was filled with calls to boycott the airline. The Industrial and Commercial Bank of China even put out a strong sell rating on Cathay’s stock. State-owned enterprises were also told to not take Cathay flights.
This can happen to any company catering to the Chinese market. Finnair has already warned employees to not take part in the protests or even express an opinion; foreigners and locals working on multinationals in Hong Kong don’t even discuss the protests in the workplace to prevent irking mainland colleagues; and KPMG and PwC has issued directives to its employees to not make any statements that may represent the company or, in KPMG’s case, also not engage in any unlawful acts at work our outside of work.
China, however, has plenty of reasons to show restraint. The tactics by the government could drive away international companies and erode Hong Kong’s status as a global financial center which, in turn, would hurt mainland Chinese companies that rely on the city for funding.
An Ongoing Appeasement of China by Airlines
The pressure applied to Cathay Pacific was the latest example of China using its influence to force airlines to change their business practices, but not the first. Last year, China issued an ultimatum to airlines regarding the designation of Taiwan, an independent nation that China views as a runaway province, mandating they refer to Taiwanese cities as part of mainland China.
While many international airlines immediately changed the designations to appease Beijing, U.S. airlines held out longer than their counterparts, though ultimately caving to Chinese demands by dropping references to the country altogether. The result was minor to passengers but the desire to appeasement Beijing lead to nearly all foreign airlines serving China to recognize Taiwan as part of the People’s Republic of China, the core of an international dispute that has been ongoing since the two split, nearly overnight.
As one of the largest Asian markets, it’s not just Chinese-related airlines that fear the repercussions of the communist state, but any airline that serves it.
The example made with Cathay Pacific could just be a pound of flesh that China wanted and things will return to normal. However, it can be said for sure that if multinational’s want access to China’s $14 trillion economy, they will have to play by the Communist Party’s rules.
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