China and Hong Kong Game Theory in a One Country, Two Systems Policy Morgan’s Money Grabbers Miran Ahmad | Somit Guha | Kurt Sheline | Hiu Yu

Fast Facts Hong Kong (HK) China HK % of China Ethnic Groups 94% Chinese Population 7.2 million GDP (nominal) $303 billion Per Capita: $41,000 Economic Activity Services: 59.7% Trade: 26.4% Industry/Other: 13.9% Stock Exchange Hang Seng: 6th China Ethnic Groups 99.9% Chinese Population 1,400 million GDP (nominal) $9,500 billion Per Capita: $7,000 Economic Activity Services: 46.1% Industry: 43.9% Agriculture: 10.0% Stock Exchange Shanghai: 7th Shenzhen: 11th HK % of China 0.5% 3.2% 78.5% Spoken agenda Highlight size of HK compared to China and the history of democracy

“One Country, Two Systems” Chapter 1, Article 5 - Hong Kong’s constitutional document following reunification with China in 1997: “China’s socialist system and policies shall not be practised in the Hong Kong Special Administrative Region (SAR), and the previous capitalist system and way of life shall remain unchanged for 50 years” Following reunification Hong Kong is responsible for its own domestic affairs including: Maintaining its own currency and responsible for independent monetary and financial policies Implemented through the Basic Law of Hong Kong. A high degree of autonomy with executive, legislative and independent judicial power Formulate own policies on education, culture, sports and social welfare This was how HK is supposed to be run once it was returned to China China will hold control over Hong Kong’s Foreign Affairs and provide the country with defense services

Civil Disobedience History 2001 - Deputy CE Anson Chan, resigns under pressure from Beijing. 1842 - China cedes HK to Britain following First Opium War 1992 – Britain announces proposals for democratic reform in HK. China is outraged. 2007 – July 1 protests. 58,000. Beijing says it will allow HK to elect own leader in 2017. 2011 – July 1 protests. 218,000 protest. 2013 – July 1 protests. 430,000 protest. 1898 - China leases HK to Britain for 99 years. 1997 - Hong Kong is handed back to the Chinese. 2002 – Article 23 Pro-democracy protests. 500,000 protest. 2011 – Pro-democracy protests in China across 13 cities. 1984 - Britain and China sign "one country, two systems" formula. 1998 - First post-handover elections held. 2004 - China rules that its approval must be sought for any changes to Hong Kong's election laws. 200,000 protest. 2009 – Tiananmen Square 20th anniversary protests. 2014 - Chinese government rules out a fully democratic election for Hong Kong leader in 2017. 500,000 protest. 1989 – Tiananmen Square protests in 400 Chinese cities. 7 months of martial law. Under British rule for 99 years, handed back to China in 97. There have been a number of protests really beginning in 92 about how HK would be transitioned back to China. 1997 - Tung Chee-hwa, a Shanghai-born former shipping tycoon with no political experience, is hand-picked by Beijing to rule the territory following the takeover.

Competitor Analysis (Isolated) Assumptions Strategy Goals Capabilities Short-Term Negotiations possible Non-violent demonstrations, scale, solidarity Social media Negotiations Protests Long-Term Give up Non-violent/violent demonstrations Universal Suffrage Scale Tech savvy HK Protesters Short-Term PRC want increased influence in HK, Status quo Containment via police Stop protests Police, political Long-Term Communism in HK Fear democratic uprising in PRC Negotiations Containment via police/other means (e.g.triads) Political and economic stability Military, 3rd party groups, censorship, technology Chinese Gov. Assume the situation is in a bubble. What does the Chinese Government think the HK protesters assume and want What does the HK protesters assume China want and can do

Initial Ordinal Payoffs (2) HK: Protests to gain universal suffrage (3) PRC: Crackdown on HK will affect economy and reputation of HK (1) HK: Spreads message to gain universal suffrage (2) PRC: Crackdown on HK will affect economy and reputation, but assume it will end soon PRC   Fight Not Fight Fight the law 2,3 1,2 3,4 4,1 Protesters (3) HK: Do not want status quo, but this helps to spread their message (4) PRC: Crackdown on HK if there are no protests will have a major effect on the business and reputation of HK Government (4) HK: Status quo is unacceptable (1) PRC: Happy with the status quo

Refining the Game Hong Kong Protesters Chinese Government 1 1 2 2 3 Overconfidence Bias Loss Aversion 1 1 Already have certain freedoms and they are averse to having them taken away The Chinese Central Government did not expect the protests to continue very long Commitment National Security 2 2 The protestors have already committed to continue the protests Continued social and traditional media censorship Hindsight Bias 3 Expect HK protesters to behave like both mainland and HK protesters have in the past LOCAL GLOBAL

Competitor Analysis (Global) Assumptions Strategy Goals Capabilities Short-Term Negotiations possible Non-violent demonstrations, scale, solidarity Social media Negotiations Protests Long-Term Give up Non-violent/violent demonstrations Universal Suffrage Scale Tech savvy HK Protesters Short-Term Increased influence, Status quo Containment via police Stop protests Police, political Long-Term Communism in HK Fear democratic uprising in PRC Negotiations Containment via police/other means (e.g.triads) More to lose, more willing to fight Political and Economic stability Shanghai as financial hub RMB as world’s reserve currency International reputation Internal security Military, 3rd party groups, censorship, technology Chinese Gov. What does the Chinese Government think the HK protesters assume and want What does the HK protesters assume China want and can do

Refined Ordinal Payoffs (2) HK: Protests to gain universal suffrage (2) PRC: National security risk of allowing protests to continue outweigh reputation (1) HK: Fighting w/o response spreads message (3) PRC: Reputation + risk of spreading makes not fighting harder to justify PRC   Fight Not Fight Fight the law 2,2 1,3 3,4 4,1 Protesters (3) HK: Doesn’t want status quo, wants universal suffrage (4) PRC: Crackdown on HK if there are no protests will affect business and reputation of HK (4) HK: Status quo is unacceptable (1) PRC: Happy with the status quo

Game Theory - Recap (Original) Fight Not Fight Fight the law 2,3 1,2 Dominance   Fight Not Fight Fight the law 2,3 1,2 3,4 4,1 Hong Kong protestors have a dominant strategy in fighting proposed legislation regardless of whether we view the situation as and isolated game (Original) or as a global game (Refined). Same Game? Both competitors understand they are playing an “I Go You Go Game” but have different payoffs because… (Refined)   Fight Not Fight Fight the law 2,2 1,3 3,4 4,1 Playing a one-shot, isolated game Dominant Strategy Playing a repeated game, with a global focus They are both playing a Hawk/Dove game, but the assumed payoffs are not the same. This makes it an interesting

Changing the Game Hong Kong Protesters Chinese Government 1 1 $$$ 2 2 Raising the Stakes Chinese Government Avoiding Detectability 1 1 Using non-state actors to punish HK protesters without official sanction Financially: Sustained disruption of Hong Kong’s economic activity Socially: Continued use of social and traditional media to portray struggle $$$ Appearing Irrational 2 Use or threatening use of excessive force or enforcing massive martial law Demonstrating the ‘Value of Commitment’ 2 Partnerships with corporations that would leave HK if it became more like China HK protesters committing to further strikes in advance Limiting Protesters Potential Moves 3 Censorship, hampering communication

Fight On? Fight Not Fight Fight the law 2,2 1,3 3,4 4,1 Nice Fight   Fight Not Fight Fight the law 2,2 1,3 3,4 4,1 Nice Fight Betrayal Cooperation Forgiveness Fight / Fight is unsustainable in the long-term Solution? Explore new ways to cooperate, coordinate or compromise. For Example: Allow Hong Kong citizens to pick and elect their own candidates but establish PRC Senior Advisor to HK Chief Executive

Summary Game Theory Behavioral Analysis Competitor Analysis Data Evaluation from an isolated to a global game, likely equilibria and options how participants can change the game Behavioral Analysis Overview of potential biases effecting behaviors and how they may impact the game Competitor Analysis Detailed competitor analysis and how parties view one another’s capabilities and strategies in the short and long run Data Summarized the Hong Kong landscape and its past and current relationship with China