A phrase you hear used with a lot more friction than before, remarks a senior Hong Kong investment banker on the theme of geopolitics, is “worst-case scenario”.
Its enhanced deployment, he adds, is revealing. However remote the worst-case scenario may be, a diminishing number of companies and investors feel they have any permission to ignore that risk.
The worst-case scenario that most concerns him centres on China, the US, the ambitions of Xi Jinping, the aggressively tight consensus in Washington and the fate of Taiwan. Things may yet calm down, and leadership summits may defuse tensions, but for now at least the hostility feels irreversible and the divergence permanent. An alarming combination.
The coming months, the banker suspects, will hum with experiments and contingency planning (some overt, some much less so) based around a grand — but now more obligatory — pessimism.
“There is a huge terror among US and European investors now that if something happens with China, you get wiped out,” says a senior US asset manager. “As the main centre of allocation of foreign capital into China, Hong Kong is acutely sensitive to that terror.”
At the same time, Hong Kong is a sensible place for multinationals and global funds to begin forming a plan. They should start with an assumption of the abrupt end of life as we know it, recommends one fund manager, and work backwards.
The Russian invasion of Ukraine has made this planning a more focused process than it might otherwise have been. The spectacle of decades-long corporate investments in Russia evaporating and entire portfolios of assets being marked to zero overnight has powerfully shaped an equivalent fear around China.
There are two areas in which Hong Kong is likely to provide both early and regular indicators of where the thinking of global funds and multinational corporations has moved on China risk. Watch Hong Kong, says another banker, reaching for another phrase of the moment, for an inkling of how everyone is now “recalibrating their options”.
One of the first big signs of a radical shift in thinking, say bankers and other advisers, has been what they report as a rising number of US and European multinationals exploring the idea of entirely carving out their China businesses and listing them separately. Hong Kong would be a probable destination for those initial public offerings.
AstraZeneca, the UK-headquartered pharmaceutical giant, looks to be among the first to have taken this sort of planning beyond the purely theoretical but the bankers are clear that many others have at least begun to look into it.
There would undoubtedly be a range of different approaches, and significant pitfalls. But the fundamental idea of ringfencing the China business would be to secure two forms of protection. The main company would no longer face interrogation on its China exposure; the China business might, in the event of some crackdown on foreign firms, be allowed to survive if its local listing meant Beijing now deemed it a domestic player.
For the time being, the benefit for companies of exploring this option may be largely psychological and, if necessary, a way of appeasing shareholders: businesses will leave their plan B prominently on the chief executive’s desk, but hope it gathers dust. If the strategy catches on as widely as bankers suspect it will, though, the collective stash of plan Bs will be a useful litmus test of corporate worry: the more plans that are heard being dusted-off, the greater the sense of peril.
Another set of experiments that Hong Kong should be in a strong position to observe is how companies actually respond to all that pressure on them to “de-risk” supply chains. Many of them, say bankers involved in financing these proposed moves, have quite genuinely rerouted supply chains out of China and into south-east Asia and beyond. Many are motivated by the need to be seen to be doing something.
But, as many have discovered, the hopes of a quick and extensive “lift and shift” need to be tempered by the reality of the scale and complexity of China’s manufacturing set-up. There was a lot of very ambitious talk about engineering an exodus from China, say bankers, but it has been significantly scaled back.
Again, companies’ stated efforts to respond appropriately to worst-case scenario chatter are likely to resume in line with the perceived level of risk. The bankers closest to the ground — many in Singapore, but far more in Hong Kong — should be able to tell how much is actually happening.
