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Fears of a Military Crackdown in Hong Kong are Overblown

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I happened to be in the Hong Kong airport on Tuesday, the night anti-government demonstrations erupted into a violent clash with police. I was there to pick up my kids, who were returning from Tokyo to begin the new school year. Their flight was delayed by several hours, which I passed sardined among throngs of protestors fervently chanting "Fight for freedom! Stand with Hong Kong!"

My kids emerged from Customs around 10:30 p.m. We boarded the Airport Express without incident. By the time our train reached the downtown terminal, the Internet was blowing up with video of protestors beating and kicking men they believed to be pro-Beijing infiltrators, and attacking a policeman with what appeared to be his own club. Police struck back with tear gas, clubs, riot shields and, in one particularly scary scene, a loaded pistol. The melee broke out just minutes after our train pulled away.

Things in Hong Kong have settled down a bit since Tuesday. Protestors have apologized for their behavior at the airport, and are abiding by a court order that restricts space allowed for public protest at the airport to two tiny areas in the arrival hall. The government has sought to mollify the public with a $2.4 billion package of economic "sweeteners."

As I write, there's a rally in Central organized by the teachers union. Another is planned for tomorrow in Victoria Park. Police have made more arrests. But for now both sides seem to have backed off.

As the confrontation in Hong Kong ebbed, concern in Washington seemed to surge. Hours after the airport clash, President Trump took to Twitter to warn: "Our Intelligence has informed us that the Chinese Government is moving troops to the Border with Hong Kong." By mid-week, the Beltway—and the US media—was abuzz with "reports" that Chinese "paramilitary troops" were "massing" in a sports stadium in Shenzhen in preparation for a Tiananmen-style crackdown.

Trump stirred the pot again Wednesday with an uncharacteristic warning that Beijing must respond "humanely" to protests in Hong Kong if it hoped to strike a trade deal. China's leaders likely found Trump's comment that the situation in Hong Kong "is not helping" the trade talks particularly galling; no doubt they thought the same of his tweets.

I can't predict how the standoff in Hong Kong ends. But, for what it's worth, I think fears of a military crackdown—whether by dispatching troops from across the border or deploying Peoples Liberation Army soldiers already garrisoned in Hong Kong—are overblown. For China, the use of brute force to quash dissent in Hong Kong would be a public relations nightmare. If it resulted in civilian casualties, the move could backfire, bringing local residents onto the streets in even larger numbers. Imposing martial law, even temporarily, in "Asia's World City," would destroy everything that makes Hong Kong valuable to the rest of China. (More analysis on this question here, here, and here.)

In any case, Beijing has more subtle means of coping with opposition in Hong Kong. The extraordinary resignation of Cathay Pacific CEO Rupert Hogg, not to mention this week's flurry of statements of government support by Hong Kong's tycoons and even celebrities, sends a clear signal to executives at every company with a significant presence in China to consider their comments and conduct on the Hong Kong conflict with utmost care.

Clay Chandler
- Clay.Chandler@Fortune.com
- @claychandler

Economy and Trade

A break for Huawei. The U.S. Commerce Department is expected to extend a reprieve given to Huawei Technologies allowing the Chinese telecoms giant to continue purchasing from U.S. companies so that it can service existing customers. The move would be a significant concession from Trump officials who had previously insisted the 90-day extension granted Huawei in May was only a temporary stay of execution. Reuters 

Jets for Taiwan. The White House is pressing ahead with an $8 billion sale of F-16 fighter jets to Taiwan, a move sure to rankle in Beijing and complicate trade negotiations. The sale would be the largest and most significant sale of weaponry to Taiwan in decades. Washington Post

Mayday. Rupert Hogg, the CEO of Hong Kong’s flag carrier airline, Cathay Pacific, resigned Friday afternoon. Hogg had come under pressure from Beijing to prevent staff from engaging in Hong Kong’s protests; so far four staff members have been fired for related activity. Hogg and one of his deputies, who also resigned, said they are stepping down to “take responsibility” for the recent “challenging weeks.” South China Morning Post

Nothing personal. China appeared to reject overtures from Trump for a “personal meeting” with Xi Jinping, after the U.S. President made the mistake of linking the protests in Hong Kong to the ongoing trade war. A statement from the Ministry of Finance said that China had no choice but to consider retaliatory measures for Trump’s – now postponed – implementation of 10% tariffs on the remaining $300 billion basket of Chinese imports. Fortune

Data dumps. Economic data for July was weak. Urban unemployment returned to its highest level since records began and industrial production expanded at its slowest rate – 4.8% – since 2009. Retail sales growth declined as well. The weak data comes after China’s slowest quarterly growth in nearly 30 years. WSJ

Dark times ahead. JP Morgan’s chief economist Bruce Kasman says there’s a 40% chance of recession in the next six to nine months. Kasman pointed to the faltering European and Chinese economies and the U.S.-China trade war as instigators of the possible global economic downturn. And he doesn’t think China can hold out much longer against the hits it’s taking from U.S. tariffs, saying, “But boy, we just haven’t seen how far the latest damage is going to be.” CNBC

Innovation and Tech

Bytedance searches. Bytedance launched a search engine this week that sits within its signature news aggregating service, Toutiao. The search engine, Toutiao Search, skims content from Bytedance’s suite of apps – which includes short video app, TikTok – as well as the broader worldwide web. Fortune

Tencent stumbles. Bytedance appears also to have sucked ad revenue away from Tencent, as the latter missed earnings expectation for the second quarter, sending shares tumbling 4%. However, Tencent’s ad revenue still grew 16%. The company, which derives most of its income from gaming, is still recovering from a nine month freeze on game approvals that began in March last year, decimating company stock. Bloomberg

Huawei spies? Huawei staff in Uganda reportedly helped government officials spy on musician-turned-politician Bobi Wine, who is mounting an opposition to the long-standing incumbent. For some the story seemed like a smoking gun but the Journal noted it found no indication that corporate executives were aware of the situation in Uganda. Huawei has vehemently denied the Journal’s findings. Wall Street Journal

In Case You Missed It

As Hong Kong Protests Continue, Stars Get Caught Up in the Vitriol Variety

Trevor Noah Cancels Protest in Hong Kong as Protests Rage On Slate

Hong Kong Artist Jackson Wang Pulls Out of 88Rising Festival After Expressing Support for Beijing SUP China

China’s AI Dreams Aren’t for Everyone FP

Alibaba’s Strong Results Suggest Chinese Consumers Are Still Spending NYT

China Ramps Up Brazil Soybean Imports, Rebuffing U.S. Crops Bloomberg

Politics and Policy

Black hands. Senior police officers in Hong Kong disputed Beijing’s claims that foreign “black hands” are orchestrating protests in the city, saying they can’t see evidence for that on the ground. Protests in Hong Kong have descended further into violence as they drag into their eleventh week. Beijing has responded by positioning armed forces on the border and has begun condemning the demonstrators as close to terrorists. Telegraph

Meltdown. The U.S. Department of Commerce added China’s largest state-owned nuclear power company, China General Nuclear Power Group (CGN), to its feared “entity list.” U.S. companies are prohibited from selling to blacklisted “entities.” The Commerce Department says CGN is diverting U.S. nuclear tech to China’s military. Chinese state media denies it. CNBC

This edition of CEO Daily was edited by Eamon Barrett. Find previous editions here, and sign up for other Fortune newsletters here.