The mutual antipathy between Beijing and Washington, plus a tilt towards more heavy-handed statism in China, pose acute threats to companies operating across Asia, and more widely.

Undeniably, such shifts are of deep concern. However, such changes also offer distinct opportunities to businesses operating from “neutral” locations, and for those that respond with dexterity and independence.

Despite these murky times, SVA can advise on how best to chart a route, so as to protect company interests, or even to benefit.

Deep antipathy in the US

The media focus on the divisive presidential campaign in the US has distracted from a cross-party consensus that the People’s Republic of China (“PRC”) has become a threat to American national interests. Whoever becomes president, the risks for foreign businesses operating in China will rise, even if operating outside high technology or other strategic areas.

Of course, the two US camps differ on how to respond. Donald Trump has espoused the imposition of a blanket 60% tariff on goods from China, but also promises a combative approach towards handling US allies in the region, perhaps raising questions as to the reality of US security guarantees. His policy is perhaps simply one of “decoupling”.

The Democrats also propose measures aimed at reducing US reliance on Chinese goods, and at severely curtailing access to western technological knowhow. However, they advocate building stronger ties with regional allies such as Japan, Korea, the Philippines and Australia. That may better be described a policy of “de-risking” (if it continues).

A focus on the presidential debates, though, ignores the unpalatable and simple truth that distrust of China has permeated through almost all levels of the US system. After all, committees in the Congress, governors in state capitals, and local legislators alike regularly speak of the “China threat”.

Most advocate action, of various forms and at many levels, in response. In this context, it appears that simply trading in apparel or power tools could be viewed as distinctly unpatriotic, if not illegal.

The heavy hand of the state

In China, the risks differ, but are equally worrying.

There, the biggest concern is that the Beijing government has embarked on a much more state-centric approach to economic policymaking – what some analysts have come to call “party state capitalism”.

The Third Plenum of the 20th Central Committee of the Chinese Communist Party (“CCP”) in late July 2024, an important economic policy forum, made clear that this stance is here to stay. The aim is to ensure the maintenance of social stability, at all costs.

This interventionist stance is clearly visible in: steps to rein in overmighty Chinese conglomerates; enhanced anti-corruption campaigns; efforts to contain and direct property sector debts; extreme controls on local government borrowing; unpopular rules on bankers’ remuneration; further expansion of CCP committees in businesses; blunt efforts to channel capital towards selected industries; and more centralised and intensive industrial planning.

Beijing is also seeking to “fortify” the economy in the face of severe international tensions, with: undeclared, but substantial, gold purchases by Beijing-linked entities; efforts to expand the Cross-border Interbank Payment System (“CIPS”), so as to forestall possible ejection from the Society for Worldwide Interbank Communication (“SWIFT”) system; the widening of a network of currency swaps; and more rigorous and effective implementation of capital controls.

A stockade mentality is visible in trade policy, too. Beijing is championing the production of strategic goods, especially semiconductors, batteries, steel, ships, and key chemicals, and more recently seems to be increasing the stockpiling of commodities, such as foodstuffs, hydrocarbons, metal ores and other imports.

Such policies are sure to contribute to tensions with the US and European Union – and are affecting not just mainland China; Hong Kong, too, is under severe pressure.

Political Risk

The upshot is that the political risks for any foreign company dealing with China or Chinese counterparties are rising.

Perhaps the most overt threat is serious disruption to supply chains, thanks to tariffs or conflict. A large number of companies are at risk, ranging from simple plastic toy producers to complex high-end electronics and electric vehicle manufacturers.

A related concern must be payment risk. The imposition of heavy tariffs by the US would probably result in many companies simply failing to meet their debt obligations, or to pay for goods; and efforts to secure restitution in mainland China would certainly prove tough, as ever. In an extreme scenario, the imposition of sanctions by the US treasury on a major Chinese bank could provoke a financial crisis.

Other probable threats derive from reputational damage. Any assertion in the US Congress that a company is working with counterparties linked, even distantly, to the People’s Liberation Army (“PLA”) or the Chinese state (as is common enough amongst China’s sprawling state-owned entities) could cause significant and lasting damage to its standing in the US market, and so affect its customer base.

Such risks are especially acute for companies working with businesses tied to controversial areas, such as in the pharmaceutical precursor or fentanyl supply chain, the manufacture of semi-conductors, or the processing of lithium, copper, or rare earths. These companies could well face “naming and shaming” in legislative meetings or the media in the west.

Government interference, on all sides, is also intensifying. The authorities may ask whether investments could prove problematic, or demand that hitherto lucrative production partnerships change in nature, or come to an end. At best, such moves will throw sand in the wheels of commerce; at worst, they could sever longstanding commercial relationships, and cause extreme damage.

This situation shows every sign of deteriorating in the months ahead – with a sudden decline a real possibility. After all, the imposition of 60% tariffs on Chinese goods or sudden or unanticipated crises in the Taiwan Straits or South China Sea would certainly provoke wrenching changes at short notice.

The need for careful planning is clear, so as to be prepared for prompt action. SVA has been of service to many corporations in the past months in charting unfamiliar action plans and strategies. This problem is not legal in nature, but rather a challenging geopolitical and practical challenge.

A glimmer in the gloom

There is no doubt that this darkening outlook will affect companies around the region – but not all is doom and gloom. After all, many companies and many states do not wish to choose sides, and may yet profit from these changes. China remains a hugely important economy, trading at all levels; a focus on high-technology issues in the media ignores the immense volume of uncontroversial commerce under way.

In that context, companies from “neutral” states, such as those in Southeast Asia and the Middle East, may yet step in, buying up investments in China, or otherwise winning market share. Indeed, reports in July 2024 noted that Singapore’s Government Investment Corporation (“GIC”) is seeking to buy western companies’ interests in the PRC, as some exit in something of a panic.

Similarly, some jurisdictions might offer means of structuring so as to reduce risks, thereby acting as a kind of commercial “decompression chamber”. During the Cold War, Switzerland and Austria took on this task; now, Singapore, Qatar, and the UAE seem to be set to provide similar services.

Finally, states that offer manufacturers a means to circumvent tariffs could also benefit. Certainly, exports from Vietnam, Mexico and Thailand to the US have risen of late, in direct response to restrictions on Chinese trade. In the short term these states should prosper – although, in time, the misuse of such jurisdictions to trans-ship goods could result in action.

What can companies do to mitigate the risk.

The risk picture facing businesses across the Asia-Pacific region, then, is certainly changing for the worse. However, these shifts can also present opportunities to the non-aligned, and to the nimble. Boards can respond in several ways:

• Companies should carry out independent strategic appraisals, so as to gain a firm understanding of the threats and vulnerabilities at play. Such assessments should consider geopolitical risks alongside commercial concerns, and should ask what structural or operational changes to make in response. SVA can assist in this area.

• Analysing and auditing the structure of investments and operations through the lens of (geo)political risk should become normal practice. Such analysis is as necessary for departures from markets, as it is for new investments, and should include appraisals of alternative investment destinations. Monitoring programmes are also crucial, closely integrated into broader risk systems.

• Adherence to much more robust and independent due diligence standards is as important as ever. Boards should continue to require in depth background investigations, when looking at opportunities, and should ensure that oversight is in the hands of a “neutral” party. Such measures are especially important as information becomes harder to gather. PRC enquiries are now much more difficult, and SVA is one of few international companies still in operation, in the wake of a wholesale departure of business intelligence firms from Hong Kong and the mainland.

• Companies may consider the restructuring of operations in Hong Kong and China, with attention to corporate vehicles, finance, treasury, IT systems, and data management. Separation could protect group interests as the paths of different jurisdictions diverge. Equally, a restructuring through “neutral” jurisdictions may provide a degree of protection, or even access to opportunities.

• A much closer examination of supply chains will be crucial, so as to identify “choke points”. Considerations might include the sourcing of key inputs, the collapse of counterparties, disruption to shipping routes, and the possible closure of key ports or other transport links. Building up stockpiles in intermediary locations or developing redundancy in terms of service providers could protect company interests to a certain extent.

• Companies should focus closely on risks arising from sanctions issues. Considerations might include American sanctioning of a major Chinese bank, or the ejection of Chinese businesses from the SWIFT system. Sole reliance on a “list-based” approach via a law firm is unlikely to offer much protection in such circumstances, not least as a “tit-for-tat” response is likely. SVA provides regular information on a regular basis.

• Re-assessing reputational risks would be wise. Considerations might include the “nationality” of a business, involvement in a controversial area of production, or potential ties to political authorities and the likelihood of difficulties ahead of action.

• Examining key counterparties’ financial standing might allow for dexterity in the event of non-payment, or collapse. Assessments should consider not only the direct impact, but also how a collapse could affect the broader business ecosystem.

• A practical review of regulatory risks is important, and should include examining vulnerabilities in the event of the “weaponisation” of supervision and enforcement actions, or of taxation measures. Regulatory approvals, or the lack of them, may be worthy of consideration when selling out of an investment.

• Public relations strategies should appreciate a single clumsy statement might seriously damage a business’ standing jurisdiction. Geopolitical tensions can also lead to the deliberate distortion of narrative, resulting in a company being “dragged into” a row, fairly or otherwise.

• Boards should help staff to appreciate the changes now under way and the implications. SVA can provide training to cover geopolitical considerations alongside commercial and operational issues. Executives must consider the risks inherent in this more dangerous environment, including possible exit bans on business travellers or key company officers

• Ultimately, acting decisively is crucial, given the real prospect of a sudden deterioration in conditions. Companies should identify concerns, undertake an appraisal of the risks, report in full, and then implement essential mitigating measures. Those that fail to do so in good time will leave their interests exposed.

• SVA stands ready to assist across the region on behalf of international companies.

SVA

SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world.

We can be of assistance to your organisation in dealing with these complicated issues. If you wish to protect your business from the negative consequences of geopolitical risks, please do not hesitate to contact us.