*

Shipowners cite fears of potential sanctions,

commandeering of

vessels in military crisis

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Moves come amid US scrutiny of role of China's merchant

fleet in

conflict

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HK govt says normal for shipping firms to review

operations

based on geopolitics, trade

By Greg Torode, Jonathan Saul

HONG KONG/LONDON, March 6 (Reuters) - Some shipping

companies are discreetly moving operations out of Hong Kong and

taking vessels off its flag registry. Others are making

contingency plans to do so.

Behind these low-profile moves, six shipping executives

said, lie concerns that their ships could be commandeered by

Chinese authorities or hit with U.S. sanctions in a conflict

between Beijing and Washington.

Beijing's emphasis on the role of Hong Kong in serving Chinese

security interests and growing U.S. scrutiny of the importance

of China's commercial fleet in a possible military clash, such

as over Taiwan, are causing unease across the industry, the

people told Reuters.

The U.S. Trade Representative's office last month proposed

levying steep U.S. port fees on Chinese shipping companies and

others that operate Chinese-built vessels, to counter China's

"targeted dominance" of shipbuilding and maritime logistics.

Washington in September warned American businesses about growing

risks of operating in Hong Kong, where the U.S. already applies

sanctions against officials involved in a security crackdown.

Hong Kong for more than a century has been a hub for

shipowners and the brokers, financiers, underwriters and lawyers

supporting them. Its maritime and port industry accounted for

4.2% of GDP in 2022, official data show.

The city's flag is the eighth most-flown by ships worldwide,

according to VesselsValue, a subsidiary of maritime data group

Veson Nautical.

Reuters interviews with two dozen people, including shipping

executives, insurers and lawyers familiar with Hong Kong,

revealed growing concern that commercial maritime operations

could be ensnared by forces beyond their control in a U.S.-China

military clash.

Many pointed to China's intensified focus on national

security objectives; trade frictions; and the broad powers of

Hong Kong's leader, who is accountable to Beijing, to seize

control of shipping in an emergency.

"We don't want to be in a position where China comes

knocking, wanting our ships, and the U.S. is targeting us on the

other side," said one executive, who like others was granted

anonymity to discuss a sensitive issue.

The concerns of shipowners and their actions to curb

exposure to Hong Kong have not been previously reported. The

perceptions of risk have grown in recent years, coinciding with

a tightening security climate in the Chinese-ruled city and

tensions between the world's two largest economies.

TURNING TIDE

Commercial ships must be registered, or flagged, with a

particular country or jurisdiction to comply with safety and

environmental rules.

Despite an influx of Chinese-operated ships onto Hong Kong's

registry, the number of oceangoing vessels flagged in the city

fell more than 8% to 2,366 in January from 2,580 four years

earlier, according to independent analysis by VesselsValue.

Government data show a similar drop.

Among the ships that left Hong Kong's registry, 74

re-flagged to Singapore and Marshall Islands in 2023 and 2024,

chiefly dry-bulk carriers designed to transport commodities such

as coal, iron ore and grain. Some 15 tankers and seven container

ships separately left the Hong Kong registry for those flags,

according to VesselsValue.

The outflow of ships since 2021 marks a reversal for Hong

Kong's registry, which official data show grew roughly 400% in

two decades following 1997.

In response to Reuters questions, Hong Kong's government

said it was natural for shipping companies to review operations

given changing geopolitical and trade circumstances, and normal

for the number of ships on registries to fluctuate in the short

term.

Hong Kong would "continue to excel as a prominent

international shipping centre", a spokesperson said, outlining a

range of incentives for shipowners, including profits tax breaks

and green subsidies.

Neither the laws governing the registry nor emergency

provisions empowered Hong Kong's leader to commandeer ships to

serve in a Chinese merchant fleet, the spokesperson said.

The spokesperson declined to elaborate when asked about

industry players' concerns over how colonial-era emergency

powers might be applied during a U.S.-China conflict. The

provisions allow the city's leader to make "any regulations

whatsoever", including taking control of vessels and property.

China's defence and commerce ministries didn't respond to

questions about the role of a merchant fleet in Beijing's

warfighting plans, the potential involvement of Hong

Kong-flagged vessels, and the worries of commercial shipowners.

The U.S. Treasury and Pentagon declined to comment about

potential sanctions, shipping executives' concerns, and the role

of Hong Kong-registered vessels in a Chinese merchant fleet.

Lawyers and executives say ships can be re-flagged for

various reasons through sale, charter or redeployment to

different routes.

Basil Karatzas, U.S.-based consultant with Karatzas Marine

Advisors & Co, said Singapore had become the preferred domicile

for companies with lesser exposure to Chinese shipping and cargo

trade, because it offered many efficiencies, including its legal

system, but less risk than Hong Kong.

Singapore's Maritime and Port Authority said decisions about

domiciles and flagging were based on commercial considerations.

It had not observed any "significant change" in the number of

Hong Kong-based shipping companies relocating operations or

re-flagging vessels to Singapore.

MERCHANT FLEET

Hong Kong's shipping registry is widely regarded for its

safety and regulatory standards, executives and lawyers say,

allowing its ships to pass easily through foreign ports. Hong

Kong's flag is now flown by many of China's state-owned

international vessels.

In a conflict, these tankers, bulk carriers and large

container vessels would form the backbone of a merchant fleet

serving the People's Liberation Army to supply China's oil, food

and industrial needs, according to four security analysts and

PLA military studies.

By contrast, the U.S. has a small commercial shipbuilding

industry and far fewer ships under its flag.

While China's state-owned fleet is growing in size, it would be

a target for the U.S. in a military clash, and Beijing would

likely require other vessels to ensure supplies given its vast

needs and reliance on international sea lanes, three analysts

said.

Strategic maritime operations have surfaced on President

Donald Trump's radar. In his inauguration speech in January,

Trump threatened to "take back" the Panama Canal, which he said

had fallen under Chinese control.

He did not give specifics, but Trump's remarks focused attention

on two Panama ports operated by a subsidiary of Hong Kong

conglomerate CK Hutchison Holdings ( CKHUF ). The group, which

didn't respond to questions about Trump's comments, agreed this

week to sell a majority stake in the subsidiary to a consortium

of investors led by BlackRock ( BLK ), giving U.S. interests

control over the ports.

Trump told Congress on Tuesday that his administration will

create an office of shipbuilding in the White House and offer

new tax incentives for the sector.

A U.S. congressional study in November 2023 stated that

"cargo ships typically transport 90% of the military equipment

needed in overseas wars". It noted that Chinese shipyards had

1,794 large oceangoing ships on order in 2022, compared with

five in the U.S.

Merchant vessels were vital in Britain's long-range mission

to retake the Falkland Islands from Argentina in 1982. And

UK-flagged commercial ships operating out of Hong Kong - many

owned by local firms dependent on or controlled by China -

supplied communist Hanoi during the Vietnam War, frustrating the

U.S., declassified CIA documents show.

The need for a strong Chinese merchant fleet to help build

China's maritime power was outlined by President Xi Jinping in a

Politburo study session in 2013.

Over the last decade, Chinese government and military

documents and studies have highlighted the dual-use military

value of China's merchant ships.

Regulations enacted in 2015 required Chinese builders of

five types of commercial vessels - including tankers, container

ships and bulk carriers - to ensure they could serve military

needs, according to state media.

Since then, the state-owned COSCO line has grown

significantly.

Public COSCO documents show China is placing political

commissars - officers who ensure Communist Party goals are

ultimately served - on nominally civilian ships.

In January, the U.S. blacklisted COSCO subsidiaries for what

it said were links to the Chinese military.

COSCO did not respond to questions about its deployment of

commissars, the U.S. restrictions and what role the company's

ships, including Hong Kong-flagged ones, might play in a wartime

scenario.

'REALLY DE-RISKED'

Hong Kong remains an important base for shipowners, despite

the geopolitical challenges. But some are quietly hedging their

bets.

One company founded in Hong Kong in 2014, London-listed

Taylor Maritime ( TMILF ), now has a smaller presence in Hong Kong

after making several strategic moves over the past few years.

Since 2021, it has kept its ships flagged in the Marshall

Islands and Singapore. Its offices are in London, Guernsey,

Singapore, Hong Kong and Durban.

The firm "really de-risked Hong Kong", said a person

familiar with the matter, citing investors' concerns about a

Chinese invasion of Taiwan and the Communist Party's increasing

control of Hong Kong.

A Taylor Maritime ( TMILF ) spokesperson said that initially, the

company moved its Asia-based commercial teams to Singapore from

Hong Kong to be closer to clients.

With its acquisition of shipping company Grindrod, which had

its Asia office in Singapore, Taylor Maritime ( TMILF ) expanded its

operation there and relocated some functions from Hong Kong, to

the point where Singapore became its primary Asia hub, the

spokesperson added.

Hong Kong-listed Pacific Basin Shipping ( PCFBF ) has

traditionally flagged its 110-strong fleet of bulk carriers in

Hong Kong but is drafting contingency plans to register them

elsewhere as it gauges potential risks, said two people familiar

with the matter.

A Pacific Basin spokesperson said the company was constantly

evaluating geopolitical risks but that its fleet was still

flying the Hong Kong flag, "which at least for now outweigh(s)

the challenges".

"Being in Hong Kong positions us close to China's 40% share

of global dry bulk import/export activity and close to Asia's

strong economic and industrial growth regions," the spokesperson

said.

Angad Banga, chairman of the Hong Kong Shipowners

Association, said shipping firms adjusted contingency plans

based on risk assessments in a complex geopolitical environment

but he had not encountered concerns about the commandeering of

vessels.

"While some may be reviewing operational strategies, we as

an organisation do not to see any widespread exodus or loss of

confidence in Hong Kong," Banga told Reuters, adding that the

city remained attractive for maritime commerce.

Yet some industry figures described a broad unease about

Hong Kong that was affecting their planning.

Three lawyers said that until recent years, contracts

hammered out for the growing number of ships built in China and

financed by Chinese banks typically stipulated that they must

fly the Hong Kong flag.

But over the last two years, some have included a caveat

demanded by owners to provide flexibility: a few other prominent

flags are listed as options alongside Hong Kong, the lawyers

said. Reuters could not independently verify the changes.

Beyond China's military modernisation and its refusal to

renounce the use of force to seize Taiwan, Beijing officials

have stressed the importance of Hong Kong in fulfilling national

security priorities.

Three executives and two lawyers told Reuters that sweeping

security legislation, first imposed on Hong Kong in July 2020

and strengthened in March 2024, had added to the dangers.

The lawyers said any move by Hong Kong's leader to

commandeer vessels in an emergency might prove difficult in

practice, as locally registered ships often plied routes far

from Hong Kong. But such long-standing powers now had to be

viewed through a national security lens, they said.

Some shipowners wouldn't object to an official request to

turn over their vessels, either out of patriotism or the

potential to profit from a crisis, one lawyer said.

But "it is better not to be in a position where you might

even be asked", said another veteran lawyer.

"It was not an issue just a few years ago, in what is

clearly a redrawn national security map."