The EconomistAugust 24th 2019 Business 512 els“comparefavourablytopeers”.
Even some short-sellers backed ge—
and chastisedMrMarkopolosforgiving
thema badnamebywritinghisreportfor
aninvestorinexchangefora cutofanypro-
fitsmadeifge’s sharepricedeclined.One
prominentshort-sellercalledMrMarkopo-
los“reckless,dishonest,andmostimpor-
tantlysecretive”.
Thissuddenflurryofsupportdoesnot
meanthatgeisintheclear.JoshuaRonen,
anaccountingprofessoratNewYorkUni-
versity’sSternSchoolofBusiness,hasre-
viewedge’sofficialfilingsaboutitshold-
ings in Baker Hughes and found them
“confusing”.ThesecandtheJusticeDe-
partmentareinvestigatingitforaccount-
ingirregularitiesatitsinsuranceandpow-
er-generation divisions. ge vehemently
deniesanywrongdoing.Asfortherisks
embeddedinitslong-term-careportfolio,
the diverging opinions from Goldman
Sachs and Fitchsuggestthatreasonable
peoplecandisagreeaboutthesizeoftheli-
abilities.Buttheyarelarge.
And MrMarkopolos,too,hashisde-
fenders.CarsonBlockofMuddyWaters,a
prominentshort-seller,pointsoutthein-
vestigator’sfeeisnotimproperaslongas
hedisclosedhiseconomicinterest,which
hedid.“Nobodydoesresearchforcharity,”
MrBlocksays.Still,thefactthatsomany
peoplejumpedtoge’s defencebetraysa re-
newedoptimismaboutAmericaInc’serst-
whiledarling.WithMrCulp,recruitedafter
a successful stint running Danaher, a
smallerconglomerate,atthehelm,gemay
atlastbefindingfriendsonWallStreet. 7
M
ultinational companies in Hong
Kong operated under the convenient
illusion, nurtured by China’s Communist
Party, that the mainland would not meddle
(too much) in the territory’s business af-
fairs. That faith, already shaken during
weeks of political protests against the en-
trepot’s pro-Beijing government, is in tat-
ters following China’s treatment of Cathay
Pacific, an airline based in Hong Kong. Ear-
lier this month China’s aviation regulator
barred cabin crew found to have participat-
ed in or supported the demonstrations,
which many Cathay staff openly had, from
flying over the mainland. The carrier yield-
ed to the pressure and even fired four staff,
including two pilots. On August 16th it an-
nounced the departure of Rupert Hogg,chief executive since 2017. Though Mr Hogg
said he was taking responsibility for what
had been “challenging weeks” for the air-
line, China left little doubt as to the circum-
stances of his exit.
Businesses have a right to be rattled.
The assault on Cathay is unprecedented in
its speed and scope. Chinese state media
shrilly denounced the company, and social
media brimmed with indignant calls to
boycott it. cctv, China’s state broadcaster,
reported Mr Hogg’s departure half an hour
before Hong Kong’s bourse, where Cathay
is listed. cctv paired it with a Chinese in-
ternet meme that roughly translates to
“You would not be in trouble if you had not
asked for it.” Even after the firings, Global
Times, a party mouthpiece, accused Cathay
of a “lukewarm attitude” in disciplining
“radical employees”.
More troubling than the jingoistic out-
bursts was the concerted economic pres-
sure piled on the company. icbc, a big
state-run bank, put a “strong sell” recom-
mendation on its stock. Other state-owned
enterprises, including citic Bank Interna-
tional and China Resources, have instruct-
ed workers not to take Cathay flights.
Cathay’s ordeal has sharpened the con-
flicting pressures on multinationals in
Hong Kong with business in the mainland:
pleasing both authoritarian China and
their democracy-loving staff in Hong Kong.
Merlin Swire, the chairman of Swire Pacif-
ic, Cathay’s parent company, whose inter-
ests on the mainland range from bottling to
property, travelled to Beijing on August
12th. A foreign private-equity manager in
Hong Kong says that companies are “walk-
ing on eggshells”. A former employee at a
big Western law firm says that protests are
not to be discussed at work for fear of irking
mainland colleagues and clients. Last week
Finnair’s local recruiter warned the Finn-
ish airline’s crew that they could be barred
from flights if they linked the company’s
name with the protests on social media.
The mainland bosses of a large state-
owned enterprise recently told colleaguesin their Hong Kong subsidiary that it want-
ed to hire more staff there—but that all
would have to be vetted to ensure none had
participated in the demonstrations.
Many in Hong Kong balk at such subser-
vience. David Webb, a respected activist in-
vestor, called Cathay’s concessions “the
most appalling kowtow to Peking” and said
that its “shameful appeasement” had done
great damage to its brand. On August 20th
Jeremy Tam, a Cathay pilot who is also a
pro-democracy lawmaker, said he had quit
the airline. Days earlier a crowdfunded
newspaper ad by local employees of the Big
Four accounting firms—Deloitte, Ernst &
Young, kpmg and pwc—blamed their Hong
Kong branches for turning a deaf ear to the
protests. Global Timesduly demanded that
the firms investigate who was behind the
ad and sack them. (So far the Chinese au-
thorities have not made such demands.)Interesting times
Some business types believe things may go
back to normal. Hong Kong remains a gate-
way to China’s gargantuan market. Few
know this better than Cathay: close to a
quarter of its destinations are in the main-
land. Cathay was, in the words of one se-
nior Western banker, “the pound of flesh
that was necessary, but it was a clean cut”.
China, for its part, has an interest in re-
turning to the days when businesspeople
believed its promise of “one country, two
systems”. As for Cathay, Air China holds a
30% stake in the airline. Old rumours of the
flag carrier’s intention to buy Cathay out-
right have resurfaced. Luya You of Bocom
International, a broker, says an acquisition
would transfer Cathay’s global expertise to
Air China and “quell China’s concerns
about its foreign background” (ie, Swire).
Given all the turbulence, few expect such a
high-stakes deal to happen soon. Still, in
the meantime, Ms You has a simple mes-
sage for investors: “Do not underestimate
China’s resolve to punish Cathay as a sym-
bol for others.” Many will have heard that
disturbing message loud and clear. 7SHANGHAI
A mainland assault on Cathay Pacific
rattles multinationals in Hong KongBusiness in ChinaWings clipped