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 ➔ Ethnic Groups
◆ 94% Chinese ◆ 99.9% Chinese
➔ Population ➔ Population
◆ 7.2 million ◆ 1,400 million 0.5%
➔ GDP (nominal) ➔ GDP (nominal)
◆ $303 billion ◆ $9,500 billion
◆ Per Capita: $41,000 ◆ Per Capita: $7,000 3.2%
➔ Economic Activity ➔ Economic Activity
◆ Services: 59.7% ◆ Services: 46.1%
◆ Trade: 26.4% ◆ Industry: 43.9%
◆ Industry/Other: 13.9% ◆ Agriculture: 10.0%
➔ Stock Exchange ➔ Stock Exchange
◆ Shanghai: 7th 78.5%
◆ Hang Seng: 6th
◆ Shenzhen: 11th
 “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

China will hold control over Hong Kong’s Foreign Affairs and provide the country with defense services
 Civil Disobedience History
2001 - Deputy CE
1842 - China 1992 – Britain announces 2007 – July 1 2011 – July 1
Anson Chan, resigns
cedes HK to proposals for democratic protests. protests. 218,000
under pressure from 2013 – July
Britain following reform in HK. China is 58,000. Beijing protest.
Beijing. 1 protests.
First Opium War outraged. says it will
allow HK to 430,000
1898 - China leases 1997 - Hong Kong is 2002 – Article 23 2011 – Pro-democracy protest.
elect own
HK to Britain for 99 handed back to the Pro-democracy protests in China
leader in 2017.
years. Chinese. protests. 500,000 across 13 cities.
protest.

1984 - Britain and 1998 - First post- 2004 - China rules 2009 – Tiananmen
China sign "one handover elections that its approval must Square 20th 2014 - Chinese
country, two held. be sought for any anniversary government rules out a fully
systems" formula. changes to Hong protests. democratic election for
Kong's election laws. Hong Kong leader in 2017.
1989 – Tiananmen Square 200,000 protest. 500,000 protest.
protests in 400 Chinese cities.
7 months of martial law.
 Competitor Analysis (Isolated)
Assumptions Strategy Goals Capabilities

Short- Negotiations Non-violent demonstrations, scale, Negotiations Protests

Protesters

Term possible solidarity

Social media
HK

Long-Term Give up Non-violent/violent demonstrations Universal Scale

Social media Suffrage Tech savvy

Short- PRC want increased Containment via police Stop protests Police,
Term influence in HK, political
Chinese Gov.

Status quo

Long-Term Communism in HK Negotiations Political and Military, 3rd party

Fear democratic Containment via police/other means economic groups,
uprising in PRC (e.g.triads) stability censorship,
technology
Initial Ordinal Payoffs
(2) HK: Protests to gain universal suffrage (1) HK: Spreads message to gain universal
suffrage
(3) PRC: Crackdown on HK will affect economy
and reputation of HK (2) PRC: Crackdown on HK will affect economy
PRC and reputation, but assume it will end soon

Not
  Fight
Fight

Protester
Fight
2,3 1,2
the law
s Not
3,4 4,1
Fight
(3) HK: Do not want status quo, but this helps to
spread their message (4) HK: Status quo is unacceptable

(4) PRC: Crackdown on HK if there are no (1) PRC: Happy with the status quo
protests will have a major effect on the business
and reputation of HK Government
Refining the Game
Hong Kong Protesters Chinese Government

Loss Aversion Overconfidence Bias

1 1
Already have certain freedoms and they are The Chinese Central Government did not
averse to having them taken away expect the protests to continue very long

Commitment National Security

2 2
The protestors have already committed to Continued social and traditional media
continue the protests 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- Negotiations Non-violent demonstrations, Negotiations Protests

HK Protesters

Term possible scale, solidarity

Social media

Long- Give up Non-violent/violent Universal Suffrage Scale

Term demonstrations Tech savvy
Social media

Short- Increased Containment via police Stop protests Police,

Term influence, Status political
Chinese Gov.

quo

Long- Communism in Negotiations Political and Economic stability Military, 3rd party
Term HK Containment via police/other Shanghai as financial hub groups,
Fear democratic means (e.g.triads) RMB as world’s reserve censorship,
uprising in PRC More to lose, more willing to currency technology
fight International reputation
Internal security
Refined Ordinal Payoffs
(2) HK: Protests to gain universal suffrage
(2) PRC: National security risk of allowing
protests to continue outweigh reputation
PRC
(1) HK: Fighting w/o response spreads
message
(3) PRC: Reputation + risk of spreading
makes not fighting harder to justify

Not
  Fight
Fight

Protester
Fight
2,2 1,3
the law
s Not
3,4 4,1
Fight

(3) HK: Doesn’t want status quo, wants universal

suffrage (4) HK: Status quo is unacceptable

(4) PRC: Crackdown on HK if there are no (1) PRC: Happy with the status quo
protests will affect business and reputation of HK
 Game Theory - Recap
(Original)
Dominance
Not
  Fight Hong Kong protestors have a dominant strategy in fighting proposed
Fight
legislation regardless of whether we view the situation as and isolated
Fight game (Original) or as a global game (Refined).
2,3 1,2
the law

Not Same Game?

3,4 4,1
Fight Both competitors understand they are playing an “I Go You Go Game”
but have different payoffs because…
(Refined)
Not
  Fight
Fight
● Playing a one-shot, isolated ● Playing a repeated game,
Fight game with a global focus
2,2 1,3 ● Dominant Strategy
the law

Not
3,4 4,1
Fight
Changing the Game
Hong Kong Protesters Chinese Government

Raising the Stakes Avoiding Detectability

1 1
Using non-state actors to punish HK
Financially: Sustained disruption of
$$$ protesters without official sanction
Hong Kong’s economic activity

Socially: Continued use of social and Appearing Irrational

traditional media to portray struggle
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
2
Use or threatening use of excessive
force or enforcing massive martial law
Limiting Protesters Potential Moves
3
Censorship, hampering communication
 Fight On?
Not
  Fight
Fight Betrayal
Nice Fight
Fight
2,2 1,3
the law

Not
3,4 4,1 Cooperation Forgiveness
Fight

Solution? Explore new ways to cooperate, coordinate or

Fight / Fight is
compromise.
unsustainable in the
long-term For Example: Allow Hong Kong citizens to pick
and elect their own candidates but establish PRC
Senior Advisor to HK Chief Executive
Summary

● Evaluation from an isolated to a global game, likely equilibria

Game and options how participants can change the game
Theory

Behavioral ● Overview of potential biases effecting behaviors and how they

may impact the game
Analysis

● Detailed competitor analysis and how parties view one another’s

Competitor Analysis capabilities and strategies in the short and long run

Data ● Summarized the Hong Kong landscape and its past and current
relationship with China