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Cathay's 'unusual position' makes it 'vulnerable to pressure' from Beijing, analyst says

Lisa Micheal 3 Aug 19
Rupert Hogg, chief executive officer of Cathay Pacific Airways Ltd., attends a news conference in Hong Kong, China, on Wednesday, Mar. 13, 2019. The airline announced Hogg's resignation on Mar.16.

Cathay Pacific's CEO Rupert Hogg officially stepped down on Monday amid what the company called "challenging weeks for the airline."

The company was recently caught in the Hong Kong protests, where staff reportedly took part in the pro-democracy rallies that have enraged Beijing. Hogg's sudden resignation was announced days after China's Civil Aviation Administration issued a "major aviation safety risk warning" to the airline.

Hong Kong, a special administrative region of China, has seen more than 11 weeks of protests over a now-suspended extradition bill that would have allowed people in the territory to be sent to the mainland for trial.

Most firms in Hong Kong that engage in business with mainland China know that there is always a degree of political risk that needs to be navigated.

In a statement released Friday, the company said it remains fully committed to Hong Kong under the principle of "One Country, Two Systems" — which allows the territory a certain degree of legal and economic autonomy.

Two of the airline's largest shareholders are Swire Group — a Hong Kong and London-based diversified conglomerate that owns 45% of the airline — and Air China, a Chinese state-owned air carrier group which owns 22.65% of Cathay, according to data provided by Refinitiv.

Hogg's sudden resignation is a special case on its own, said Duncan Innes-Ker, regional director for Asia at The Economist Intelligence Unit. "Cathay is in a slightly unusual position in that a large Chinese (state-owned enterprise) has a significant stake in its share ownership," Innes-Ker said.

"Companies that have an SOE as an equity partner are likely to be especially vulnerable to pressure from the Chinese authorities. Cathay's China routes are also crucial to its business model and future growth, so this makes it doubly susceptible," he told CNBC.

He explained that "most firms in Hong Kong that engage in business with mainland China know that there is always a degree of political risk that needs to be navigated."

Since the former British colony was handed over to Beijing in 1997, China has very much recognized it needs Hong Kong, David Dodwell, executive director at HK-APEC Trade Policy Group told CNBC in early August. That was especially true when China was still opening up to the rest of the world, he said at that time.

"There are a lot of things within China that can't be done in China, and Hong Kong is indispensable for that," Dodwell said. The city is not just a financial capital but also an important "headquarter capital, " he added, explaining that many Chinese and foreign companies use Hong Kong as their headquarters because of the array of services the city offers.

Protesters take part in a rally against extradition bill on July 1, 2019 in Hong Kong, China.

"The recent events at Cathay Pacific show that Beijing is willing and able to use its economic power to demand high-level personnel changes way outside its normal remit, at a private company that is not headquartered in mainland China," said Ben Bland, director at Australian think tank The Lowy Institute.

That potential external pressure from mainland authorities "will be a deep concern for international companies in Hong Kong," Bland told CNBC on Monday.

In fact, this might be already happening.

State-owned tabloid Global Times said last week there have been calls for top accounting firms in Hong Kong to fire their employees who were "pro-riot."

Several international businesses in Hong Kong have issued statements reiterating their support of the "one country, two systems," and some have even issued warnings to employees saying the company has zero tolerance to those who were politically involved in the protests.

— CNBC's David Reid and Evelyn Cheng contributed to this report.