China: Flashpoint Hong Kong

Published on May 21, 2020
SGH Insight
** Rumors in the Hong Kong press this morning that the mainland could take matters into its own hands had already unnerved local markets. But the decision to draft new legislation in Beijing that would be inserted into the city’s legislation through an “Annex III” provision of Hong Kong’s Basic Law was the most hardline among the various options at Beijing’s disposal.

** On May 6, U.S. Secretary of State Mike Pompeo announced a delay in the annual certification now required by Congress of whether Hong Kong still enjoys a level of autonomy from Beijing that can “justify continued special treatment by the U.S. for bilateral agreements and programs.” The reason for the delay was, precisely, “to account for any additional actions that Beijing may be contemplating [at] the May 22 National People’s Congress that would further undermine the people of Hong Kong’s autonomy” (see SGH 5/15/20, “China: This is Not 2019”).

** Today’s actions will make that certification tough, if not near impossible politically, which could result in the removal by Congress of some special business and trading privileges granted to the Hong Kong Special Administrative Region. But an equally plausible, and perhaps more targeted, response from the Trump administration and Congress would be sanctions or actions aimed at individuals in Beijing, the Communist Party of China, or at the People’s Republic of China itself.

Market Validation
(Dow Jones 5/22/20)

Investors' concerns over escalating U.S.-Chinese tensions that re-emerged Thursday -- are spilling over into the Friday trading session as the three-day Memorial Day weekend approaches.
Dow Jones Industrial Average futures are off 0.4%, S&P 500 futures have fallen 0.3% and futures on the Nasdaq Composite declined 0.5%.
Overseas stocks are lower as well, led by a drop of 5.6% in Hong Kong, where stocks plunged in response to a Chinese plan to impose new national-security laws. The U.K.'s FTSE 100 Index is off 1%, while Japan's Nikkei 225 Index fell 0.8%.
Oil is also down in early Friday trading, ending a 6-day hot streak with a thud. Benchmark crude-oil futures are down almost 7%.

(Policy Validation - Dow Jones 5/22/20)

WASHINGTON -- U.S. senators are introducing a bipartisan bill that would sanction Chinese party officials and entities who enforce the new national-security laws in Hong Kong, and the legislation also would penalize banks that do business with the entities.
Sen. Chris Van Hollen (D., Md.) and Sen. Pat Toomey (R., Pa) said they had been working on the bill already but Thursday's developments made the legislation more urgent. They said they will urge Senate leaders to take up the matter quickly.
Earlier Thursday, China signaled it will impose new national-security laws on Hong Kong, dealing a blow to the territory's autonomy as Beijing moves to stop widespread pro-democracy protests that have challenged leader Xi Jinping.
"We would impose penalties on individuals who are complicit in China's illegal crackdown in Hong Kong," Mr. Van Hollen said. He called the move by Beijing "a gross violation" of China's agreement with the U.K. to preserve more freedom and autonomy in the territory.
Mr. Toomey called the move by China "very, very deeply disturbing."
Last year, President Trump signed a bill designed to show solidarity with pro-democracy protesters in Hong Kong, despite expressing concerns it could complicate U.S.-China trade talks.

Tensions between China and the United States have been steadily mounting on multiple fronts, and the first day of the week-long “Two Sessions” meetings of China’s national legislature and political advisory body has now pulled Hong Kong dramatically into the picture again with a hardline move by Beijing that will be sure to incite renewed unrest in the region as well.

** Late today, local time, Xia Baolong, director of the State Council’s Hong Kong and Macau Office (HKMAO), pulled Hong Kong’s deputies to the National People’s Congress into a private meeting to brief them on draft legislation that would force Hong Kong to enact a controversial national security law that would ban acts of ”treason, secession, sedition, or subversion.”

** Rumors in the Hong Kong press this morning that the mainland could take matters into its own hands had already unnerved local markets. But the decision to draft new legislation in Beijing that would be inserted into the city’s legislation through an “Annex III” provision of Hong Kong’s Basic Law was the most hardline among the various options at Beijing’s disposal.

** On May 6, U.S. Secretary of State Mike Pompeo announced a delay in the annual certification now required by Congress of whether Hong Kong still enjoys a level of autonomy from Beijing that can “justify continued special treatment by the U.S. for bilateral agreements and programs.” The reason for the delay was, precisely, “to account for any additional actions that Beijing may be contemplating [at] the May 22 National People’s Congress that would further undermine the people of Hong Kong’s autonomy” (see SGH 5/15/20, “China: This is Not 2019”).

** Today’s actions will make that certification tough, if not near impossible politically, which could result in the removal by Congress of some special business and trading privileges granted to the Hong Kong Special Administrative Region. But an equally plausible, and perhaps more targeted, response from the Trump administration and Congress would be sanctions or actions aimed at individuals in Beijing, the Communist Party of China, or at the People’s Republic of China itself.

** In parallel, the U.S. House of Representatives will now be reviewing a bill passed yesterday by the Senate to delist companies (mainly Chinese) that refuse to comply with U.S. accounting and audit requirements from its exchanges. That bill, sponsored by Senators John Kennedy (R-LA), and Chris van Hollen (D-MD), is a rewrite of Senator Marco Rubio’s (R-FL) Equitable Act – Rubio signed on as one of its co-sponsors – and it passed the upper chamber in a unanimous vote. We have high conviction that the measure will pass the House as well and be signed soon into law by President Trump.

Back to list