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A 203-Year-Old Trading Empire Faces China’s Wrath Over Hong Kong

A 203-Year-Old Trading Empire Faces China’s Wrath Over Hong Kong

(Bloomberg Businessweek) -- In the 1990s, as Britain was preparing to hand over Hong Kong to China, Adrian Swire was worried. The chairman of the Swire business empire based in the longtime British colony was concerned that its Cathay Pacific Airways Ltd. could lose traffic rights once China took charge in 1997. He decided to make a deal: allow Chinese-owned enterprises to increase a stake in Cathay to ensure friendly ties with Beijing, according to his since-declassified correspondence with John Major, U.K. prime minister at the time, and his government. State-owned Air China Ltd. is currently the carrier’s second-biggest shareholder after Swire.

Today, after months of protests that have widened the divide between the semiautonomous region’s residents and the central government in Beijing, Swire’s 45-year-old son, Merlin, now chairman of the group’s publicly traded Swire Pacific Ltd., finds himself in a similar quandary. After some of the carrier’s more than 32,000 employees joined the protests, China’s aviation authority made clear government officials’ displeasure with what they saw as a possible threat to aviation safety. Chinese officials called for some Cathay workers who had publicly supported pro-democracy protesters to be banned from flying into and over China and asked for the names of all Cathay workers whose jobs take them through Chinese airspace. China also demanded that Cathay draw up a new plan to improve flight safety and security measures. And, in case that pressure wasn’t intense enough, some big state-owned businesses including China Citic Bank International Ltd. and China Huarong International Holdings Ltd. advised employees not to book Cathay flights.

Merlin Swire, whose family fortune is worth more than $3.5 billion, flew to meetings with officials in Beijing. The airline quickly acceded to China’s demands and on Aug. 16—following massive protests at Hong Kong International Airport— announced the resignation of its British-born chief executive officer, Rupert Hogg, as well as one of his deputies. A spokeswoman for Swire declined to comment.

A 203-Year-Old Trading Empire Faces China’s Wrath Over Hong Kong

“This is the most appalling kowtow to Peking,” David Webb, a Hong Kong activist investor, wrote on his blog just hours after Chinese state broadcaster, CCTV, broke the news of Hogg’s departure on Aug. 16. “Every substantial employer in Hong Kong, in both the public and private sectors, has employees who have participated in marches that have frequently gone beyond their approved spatial or time limits. Should all the CEOs resign?”

While Merlin Swire appears to be sticking to the strategy employed by his father—working to keep peace with Beijing while focusing the business on Hong Kong—his predicament has become a cautionary tale of modern-day China, with the country increasingly willing to call out companies that want access to its lucrative consumer market but fail to toe the party line.

Cathay isn’t the only global company that’s become enmeshed with the anti-Beijing protests. Within days of the airline being castigated by the Civil Aviation Administration of China and boycotted by state-backed companies, luxury brands Versace, Coach, and Givenchy apologized for selling T-shirts that implied Hong Kong wasn’t part of China. PricewaterhouseCoopers (PwC) was accused on Chinese social media—where nationalistic posters are increasingly pushing the country’s causes—of not condemning the demonstrations enough after a purported company-linked online post appeared to support the protests. PwC said the post was a fraud. Banking giant HSBC Holdings Plc came under fire from some protest leaders after its CEO’s public praise of China’s socialist government; China and Hong Kong together account for more than a third of the value of all HSBC’s customer accounts globally.

A 203-Year-Old Trading Empire Faces China’s Wrath Over Hong Kong

Few companies have more at stake than Cathay, which is 45%-owned by Swire Pacific, with Air China holding almost 30%. Most of the airline’s workers are based in Hong Kong and its hub is the airport that had become a key site for the protesters. China, along with Hong Kong, accounts for about half of Cathay’s revenue.

Cathay was in many ways an icon of the freedoms born of Hong Kong’s British past, with one pilot even offering favorable words about the protests over his plane’s intercom. In the days leading up to Beijing’s crackdown, Cathay Chairman John Slosar told reporters the company “wouldn’t dream” of telling employees how to think. Now, with its abrupt about-face, the airline risks becoming a symbol of acquiescence to the central government.

“At the moment, I think most Hong Kongers are likely to side with” Cathay, says Lo Kin-hei, vice chairman of Hong Kong’s Democratic Party and a district councilor. Yet if Cathay “keeps on compromising,” he says, local residents might become less loyal and turn to Air China or other Chinese carriers when planning their flying.

The Global Times, a newspaper published by China’s Communist Party, said Hogg’s departure may not be enough to atone for Cathay’s “lukewarm attitude” in dealing with its “radical” employees. “Cathay Pacific’s latest gesture was viewed by many as too little to restore its scarred reputation and the loss of customers,” the newspaper said.

Repairing that relationship is important not only for Cathay, but also for its parent’s other businesses. A third of Swire’s extensive real estate portfolio, a third of its 93,000 employees, and half of its global beverage sales (it bottles Coca-Cola products in 11 Chinese provinces and Shanghai) are on the mainland.

With roots dating back to 1816, Swire’s expansion into Asia began in earnest when it partnered with R.S. Butterfield in 1866 to create Butterfield & Swire. The company had interests in steam shipping on the Yangtze, and the sugar trade, building the Taikoo dockyard and refinery in Hong Kong at the turn of the century.

Expelled from China following the communist revolution of 1949, the company started consolidating its businesses in Hong Kong. In the year earlier, it had invested in Cathay Pacific under the founder’s great-grandson, Jock Swire. A 1952 file in the company archives at the University of London titled “China Withdrawal Correspondence” is closed to the public. 

In the 1980s, Swire made a decision to invest in China in light of Deng Xiaoping’s economic reforms. It began investing in Coca-Cola bottling, and formed a relationship with the state investment vehicle Citic, which bought a stake in Cathay starting in the 1980s, though it no longer owns shares in Cathay. In the 1990s, after the Tiananmen Square crackdown, Swire stayed put, while rival Jardine moved its listed companies from Hong Kong to Singapore.

As the 1997 British handover neared, Swire appointed Chinese executives to senior positions and partnered with state-run investment firms on the mainland. 

Two decades later, Cathay workers know they’re under the microscope as well. In a recent Facebook post, the flight attendants’ union asked members not to talk about political topics while flying and to be careful on social media and outside of work hours discussing issues that could “cause significant effect on everyone of us now.”

Webb, the activist investor, worries that the circumstances that led to CEO Hogg’s resignation could hurt Hong Kong by scaring away talent from the territory. “The mere fact this has been happening is enough to start the pressure on a brain drain,” he said in an interview. “So the longer-term effects could be quite negative. People don’t want to work in a place where they might get fired for their own views.”

Another risk, says Ivan Choy, a political scientist at the Chinese University of Hong Kong, is that Cathay’s compromise could encourage Beijing to further suppress free speech and expression among Cathay staff—and possibly among workers at other big Hong Kong companies. “This can be really dangerous,” Choy says. “It can lead to even stronger anti-Beijing sentiment in society and more social unrest.”

Still, the public drubbing of Cathay was an intentional show of government might. “The message China wanted to send was that they have the power and the will to do what they want to do,” says Shukor Yusof, founder of aviation consultant Endau Analytics. “Cathay is caught between a devil and the deep blue sea. Like many others in Hong Kong, the future of the airline is in China.” —With Kyunghee Park, Wendy Hu, Tom Metcalf, Pei Yi Mak, and Chloe Whiteaker
 

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To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net, Jodi SchneiderJames Ellis

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