Hong Kong: How Asia's World City became a trading hub for rogue states, Plus Western airlines are dropping China routes -- China Boss News 7.26.24

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What happened

If, as British author Evelyn Waugh once wrote, "[s]uccess is not defined by how high you climb, but by how gracefully you fall," the city of Hong Kong is a miserable letdown.

In Beneath the Harbor: Hong Kong's Leading Role in Sanctions Evasion, which was released last week, the Committee for Freedom in Hong Kong Foundation revealed a shocking truth: Hong Kong firms, to a staggering extent, are involved in illicit trade with Russia, North Korea, and Iran.

The revelation of Hong Kong's role in sanctions evasion by "serving some of the world's most brutal regimes and damaging international security interests by smuggling military technology, money, and prohibited commodities" worth billions is nothing short of a wake-up call.

CFHKF's findings were not mere speculations. They were backed by rigorous research, which included the analysis of Russian customs data, corporate records from Hong Kong, ship tracking information, and even leaked emails.

Its investigation revealed a significant surge in Hong Kong's exports of advanced tech to Russia, for example, including items listed by the US/EU as essential components for Russia's military systems since the latter's invasion of Ukraine.

Researchers also highlighted Hong Kong companies' long history of supporting North Korea's illicit shipping operations by enabling ship-to-ship transfers and creating false identities to avoid detection.

Some of the city's firms have even facilitated the transfer of advanced drone and missile technology to Iran, in violation of UN sanctions, which have been utilized to support military operations in the Middle East and other regions.

Why it matters

Following orders

It's important to note that Hong Kong's association with illicit trade predates its current bad acts.

Under British rule, the city was a hub for drug trafficking and the smuggling of luxury goods across the Chinese border. In 2021, the Organized Crime and Corruption Reporting Project (OCCRP) noted a record month of contraband seizures by authorities, further highlighting the city's long-standing issue with criminal enterprise.

Much of that vice came with having one of the busiest shipping ports in the world.

But Hong Kong's emergence as a top haven of illegal trade with brutal regimes has at least one stark difference. It requires elevated access to firms closely linked to the political elite of sanctioned states.

And that's where Beijing comes in since any sanctions-busting firm would need significant state support to service the world's most brutal authoritarians.

Earlier this year, Brian (Chun Hey) Kot, a Research Assistant in the Democracy, Conflict, and Governance Program at the Carnegie Endowment for International Peace, revealed how Beijing's crackdown has led to "Hong Kong's complicity" in tossing aside the West's Russia sanctions.

"In today's Hong Kong, the government follows Beijing's orders in virtually all matters of governance, particularly for issues with geopolitical salience. High levels of semiconductor trade between Hong Kong and Russia, as well as the Hong Kong government's public scorn for Western sanctions, have made Hong Kong's allegiance clear: it sits firmly in the camp of an emerging China-Russia axis," Kot wrote.

Samuel Bickett, the author of the CFHKF report, also highlighted the city's new dynamic.

"Beijing's crackdown has played a major role here. Companies in Hong Kong 'openly flout the sanctions and show no interest in even paying lip service to them," Bickett told the Guardian.

New secondary sanctions

Hong Kong's once stellar global reputation will be further tainted due to its new standing as a top trading hub for rogue states.

Asia's World City has already "lost its position as the world's freest economy to Singapore" after more than two decades because of the "erosion of impartiality in the Chinese city's legal system and judiciary," as Nikkei Asia reported last year.

Matthew Mitchell, a fellow at the Fraser Institute, which compiles the annual Economic Freedom Index, told Nikkei that the city's "repressions, combined with the government's efforts to control the private sector, inevitably led to diminished economic freedom."

"Hong Kong's prosperity will likely suffer as a result," Mitchell forewarned.

His predictions are accurate, as reports show that economists and investors alike are gravely concerned about Hong Kong's post-pandemic economic recovery.

In February, Stephen Roach, one of Wall Street's most influential economists, declared the city dead "as a bastion of dynamism" in his now infamous "Hong Kong is over" Financial Times commentary, which recounted the events that led to the demise of Hong Kong's stock market, the Hang Seng.

"The wheels came off in 2019-20 when, under Carrie Lam, the Hong Kong leadership made the mistake of proposing an extradition arrangement with China that sparked massive pro-democracy demonstrations. China's response, clamping down through the imposition of a new Beijing-centric national security law, shredded any remaining semblance of local political autonomy. The 50-year transition period to full takeover by the People's Republic of China had been effectively cut in half," Roach said.

Nevertheless, as much as local officials would like to restore Hong Kong's global business luster, they must also defer to an increasingly security-focused Beijing.

But by doing so, "many investors now believe it is increasingly hard to separate Hong Kong from the authoritarian mainland — a dilemma that has sparked an exodus of foreign firms from the city known as the Pearl of Asia," DW news staff said.

In the end, although Hong Kong's close commercial connections with some of the biggest adversaries of the international order may appease officials in China, they are another ugly and consequential blemish on the city's global reputation that will invariably lead to more secondary sanctions from Washington and Europe.

This Week's China News

The Big Story in China Business

WESTERN AIRLINES DROP CHINA ROUTES DUE TO LONGER FLIGHTS AROUND RUSSIA: Decoupling seemed to accelerate last week when Skift, an airline industry publication, revealed that Western airlines are dropping Chinese routes from their flight services.

Airline costs have risen as a result of longer flight durations, which increased after the closure of Russian airspace following Moscow’s invasion of Ukraine in 2022.

Virgin Atlantic is the latest to leave China, which it will do on October 26, 2024, after 25 years.

“Virgin confirmed that affected customers will be contacted from July 18 to discuss alternative options. Given Virgin Atlantic’s new codeshare partnership with China Eastern, it is likely passengers will be offered a place on the Chinese carrier’s Shanghai-Heathrow service,” Skift said.

Qantas also dropped China: Virgin Atlantic's choice to leave the Chinese market follows closely on the heels of Australia’s flag carrier and largest airline by fleet size, Qantas, to do the same.