China’s warning to global firms: Toe the party line on Hong Kong

The HSBC building is seen in Hong Kong. Founded in Hong Kong in 1865, the bank switched its base to London before the handover to China in 1997

As anti-government protests in Hong Kong intensified this month, KPMG issued a directive to its employees in the city: Don’t speak on behalf of the company in public. It went on to say that the firm supports China’s policy for governing Hong Kong.

PwC, another Big Four accounting giant, sent a similar message to staff telling them to avoid disclosing anything about the company on social media platforms, according to emails seen by Bloomberg.

This is the new reality for multinational businesses that have long grappled with a thorny question on China: What’s the price of access to Asia’s biggest economy? Beijing’s response to the protests, most notably its clampdown on Cathay Pacific Airways Ltd. this month, has provided one answer: compliance with the Communist Party’s worldview, from senior management on down.

“The Chinese government doesn’t see business as being separate from the state and it has made it clear that if you want to do business in China, you’d better toe the line,” said Steve Vickers, chief executive officer of political and corporate risk consultancy Steve Vickers & Associates, and the former head of the Royal Hong Kong Police Criminal Intelligence Bureau.

PwC said in an August 5 statement that it fully respects people’s right to freedom of speech, but regrets the escalation of violence related to the protests. The firm also condemned “the use of social media to spread false messages using the firm’s corporate identity” that it said were designed to mislead the public. KPMG didn’t immediately respond to a request for comment.

Cathay, Hong Kong’s flagship airline, has become a symbol of what happens when a company is judged to have crossed China’s red lines.

After some of Cathay’s staff came out in support of the Hong Kong protests, state-backed firms imposed boycotts on the airline and mainland regulators threatened to block its access to Chinese airspace. Within days, Cathay’s CEO resigned and the company acceded to a list of Beijing’s demands. At least three pilots have also left, one after he reportedly made comments about the protests to passengers on a flight to Hong Kong from Tokyo.

Hong Kong’s empires

Few corporate targets are as big as Cathay, a Hong Kong icon whose business would be crippled if it lost access to China. Yet scores of other international companies – from automakers to fashion brands to banks – could easily find themselves in a similar position.

HSBC Holdings Plc is a prime example. Founded in Hong Kong in 1865, the bank switched its base to London before the handover to China in 1997, yet still generates half its revenue in Asia, including mainland China.

On the protests, the bank has so far appeared unwilling to rein in its workforce, which stood at 238,000 full-time employees in June. According to the Financial Times, HSBC managers allowed staff in Hong Kong to attend a mid-week demonstration in June, as long as they didn’t break the law.

“The bank has always respected our employees have their own personal views on political and social matters,” HSBC said in an email.

That could be a risky stance. A cornerstone of HSBC’s strategy has been to leverage its foothold in Hong Kong to deepen its push into mainland China, where it already offers corporate and retail banking services.

The bank took a clearer stance yesterday. In an advertisement in the Chinese-language Hong Kong Economic Times, HSBC said the rule of law is indispensable for the city.

“We are very concerned about the recent social events and strongly condemn any violence and actions that disrupt social order,” the bank said in its ad.

HSBC was already in an uncomfortable spot over Washington’s legal and political tussle with Chinese technology company Huawei Technologies Co., a major client of the bank. U.S. prosecutors drew on HSBC’s relationship with Huawei to build its case against an executive at the telecommunications company, the FT reported last month.

‘Economic isolation’

China has plenty of reasons to show restraint. The government’s pressure tactics could backfire if international companies decide to leave the mainland or Hong Kong, taking with them technical expertise and good-paying jobs. Anything that erodes Hong Kong’s status as a global financial center would also hurt Chinese companies that rely on the city for offshore funding.

“This drives China straight toward what some U.S. hawks seek: economic isolation,” said Victor Shih, associate professor of political economy and Ho Miu Lam Chair in China and Pacific relations at the University of California San Diego.

Even if China’s government eases up, international companies are unlikely to escape scrutiny from the country’s increasingly nationalistic online community. Several global brands, from Versace to Calvin Klein, have apologized in recent days after Chinese Internet users called them out for products and company websites that identified Hong Kong as a distinct country, rather than being part of China.

A senior executive with a European luxury brand, who asked not to be identified given the sensitivity of the subject, said the operating assumption for years has been to be careful with China and politics. Brands carefully monitor the local response to marketing, the person said, and should be willing to cancel even high-budget initiatives if necessary.

In the high-end fashion world, star designers have long had freedom to push boundaries. Yet in the wake of an incident like Dolce & Gabbana’s chopstick debacle last year – in which the brand was scrubbed from Chinese e-commerce sites after posting videos of a clueless Chinese model trying to eat pizza and cannolis with chopsticks – even those rules are changing. A top executive at a European luxury group, who also asked not to be identified, said they are now coaching designers to cleave closely to pre-approved messages.

Complying with China’s rules can be challenging, especially for companies with employees who may not agree with the Communist Party ideology. Yet businesses who want access to the $14 trillion economy may not have a choice.

“I’m a democracy guy, but you have to face the current situation,” said Vickers, the risk consultant. “I’m not saying it’s right or legal. I’m just saying that’s how it is.” Angus Whitley, Iain Marlow & Jinshan Hong, Bloomberg