China and Hong Kong

Game Theory in a One Country, Two Systems PolicyMorgan’s Money Grabbers

Miran Ahmad | Somit Guha | Kurt Sheline | Hiu Yu

Fast Facts

Hong Kong (HK)➔ 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%

“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 History1842 - China cedes HK to

Britain following First Opium War

1898 - China leases HK to Britain for 99

years.

1984 - Britain and China sign "one

country, two systems" formula.

1992 – Britain announces proposals for democratic

reform in HK. China is outraged.

1997 - Hong Kong is handed back to the

Chinese.

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.

2014 - Chinese government rules out a fully

democratic election for Hong Kong leader in 2017.

500,000 protest.

2001 - Deputy CE Anson Chan, resigns under pressure from

Beijing.

1989 – Tiananmen Square protests in 400 Chinese cities.

7 months of martial law.

2002 – Article 23 Pro-democracy

protests. 500,000 protest.

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.

2009 – Tiananmen Square 20th anniversary

protests.

2013 – July 1 protests. 430,000 protest.2011 – Pro-democracy

protests in China across 13 cities.

Competitor Analysis (Isolated)H

K

Pro

test

ers

Ch

ine

se G

ov.

Short-Term

PRC want increased influence in HK,

Status quo

Containment via police Stop protests Police,political

Long-Term Communism in HKFear democratic uprising in PRC

NegotiationsContainment via police/other means

(e.g.triads)

Political and economic stability

Military, 3rd party groups,

censorship, technology

Assumptions Strategy Goals Capabilities

Short-Term

Negotiations possible

Non-violent demonstrations, scale, solidarity

Social media

Negotiations Protests

Long-Term Give up Non-violent/violent demonstrationsSocial media

Universal Suffrage

ScaleTech savvy

Initial Ordinal Payoffs

  FightNot

Fight

Fight the law

2,3 1,2

Not Fight

3,4 4,1

(2) HK: Protests to gain universal suffrage

(3) PRC: Crackdown on HK will affect economy and reputation of HK

(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

(1) HK: Spreads message to gain universal suffrage

(2) PRC: Crackdown on HK will affect economy and reputation, but assume it will end soon

Pro

test

ers

PRC

Refining the Game

Continued social and traditional media censorship

The Chinese Central Government did not expect the protests to continue very long

Hong Kong Protesters Chinese Government

Overconfidence Bias

Commitment National Security

1

2

Already have certain freedoms and they are averse to having them taken away

1Loss Aversion

The protestors have already committed to continue the protests

LOCAL GLOBAL

2

Expect HK protesters to behave like both mainland and HK protesters have in the past

Hindsight Bias3

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

Social media

Universal Suffrage ScaleTech savvy

HK

Pro

test

ers

Ch

ine

se G

ov.

Short-Term

Increased influence, Status

quo

Containment via police Stop protests Police,political

Long-Term

Communism in HK

Fear democratic uprising in PRC

NegotiationsContainment via police/other

means (e.g.triads)More to lose, more willing to

fight

Political and Economic stabilityShanghai as financial hubRMB as world’s reserve

currencyInternational reputation

Internal security

Military, 3rd party groups,

censorship, technology

Refined Ordinal Payoffs

  FightNot

Fight

Fight the law

2,2 1,3

Not Fight

3,4 4,1

(2) HK: Protests to gain universal suffrage

(2) PRC: National security risk of allowing protests to continue outweigh reputation

(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

(1) HK: Fighting w/o response spreads message

(3) PRC: Reputation + risk of spreading makes not fighting harder to justify

Pro

test

ers

PRC

Game Theory - Recap

● Playing a one-shot, isolated game

● Dominant Strategy

● Playing a repeated game, with a global focus

  FightNot

Fight

Fight the law

2,3 1,2

Not Fight

3,4 4,1

  FightNot

Fight

Fight the law

2,2 1,3

Not Fight

3,4 4,1

(Original)

(Refined)

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).

Dominance

Both competitors understand they are playing an “I Go You Go Game” but have different payoffs because…

Same Game?

Hong Kong Protesters

Raising the Stakes

Financially: Sustained disruption of Hong Kong’s economic activity

Socially: Continued use of social and traditional media to portray struggle

Changing the GameChinese Government

Avoiding Detectability

Demonstrating the ‘Value of Commitment’

Partnerships with corporations that would leave HK if it became more like China

HK protesters committing to further strikes in advance

$$$Using non-state actors to punish HK protesters without official sanction

Appearing Irrational

Use or threatening use of excessive force or enforcing massive martial law

Limiting Protesters Potential Moves

Censorship, hampering communication

1

2

1

2

3

Fight On?

Nice Fight  Fight

Not Fight

Fight the law

2,2 1,3

Not Fight

3,4 4,1

Fight / Fight is unsustainable in the

long-term

ForgivenessCooperation

Betrayal

For Example: Allow Hong Kong citizens to pick and elect their own candidates but establish PRC

Senior Advisor to HK Chief Executive

Solution? Explore new ways to cooperate, coordinate or compromise.

Summary

● Evaluation from an isolated to a global game, likely equilibria and options how participants can change the game

Data

Game Theory

Behavioral Analysis

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

capabilities and strategies in the short and long run

● Overview of potential biases effecting behaviors and how they may impact the game

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