China: “A New Cold War”

Published on May 29, 2020
SGH Insight
** But whether all today, in one shot, or over time, we believe President Trump is likely to pull the trigger on measures against China that will include sanctions, visa restrictions, including on students, restrictions perhaps on certain financial transactions, and even the possible freezing of assets of targeted individuals and institutions in China.

** We also believe there is a very high likelihood that the special treatment afforded to Hong Kong including its separate customs treaty status will be either partially or fully revoked – meaning the region would fall under the same tariff regime that is being applied by the US to mainland China. Despite hints and warnings from Washington, taking this tougher economic response seems not yet to be fully anticipated by markets.
Market Validation
Policy Validation

(Bloomberg 5/29/20)

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Markets are nervously awaiting a press conference flagged for today where President Donald Trump is expected to announce measures against China in response to its decision to force through a security law on Hong Kong, and potentially also to Beijing’s alleged role in covering up the Coronavirus outbreak and other hot button issues.

** We do not know what those measures will be – inter-departmental deliberations and discussions with the President have been kept very tight and appear to be fluid to the last minute. There is even a chance that a White House hesitant to cause undue damage to a fragile US market and economic recovery might propose ideas to be implemented over time, along with any concrete executive actions.

** But whether all today, in one shot, or over time, we believe President Trump is likely to pull the trigger on measures against China that will include sanctions, visa restrictions, including on students, restrictions perhaps on certain financial transactions, and even the possible freezing of assets of targeted individuals and institutions in China.

** We also believe there is a very high likelihood that the special treatment afforded to Hong Kong including its separate customs treaty status will be either partially or fully revoked – meaning the region would fall under the same tariff regime that is being applied by the US to mainland China. Despite hints and warnings from Washington, taking this tougher economic response seems not yet to be fully anticipated by markets.

But it is fully expected by Beijing.

Staking a Deliberate Hard Line

Beijing has since last week been bracing for a strong US response to its actions on Hong Kong – which they see as interference in a purely domestic affair – but in top level meetings through the just concluded Two Sessions there has been no indication it would lead them to even remotely consider softening or backing off their decision to expedite passage of the national security draft into law.

Senior officials in Beijing importantly see an impregnable and united front on the Hong Kong decision, with no shirking from US or other international pressure (the latter which they believe will be more verbal than anything), and if anything a tit-for-tat retaliation to whatever the White House may throw their way, as a means to deflating opposition in Hong Kong.

That sentiment was succinctly summarized by a source last week who said, “The adoption of the national security law will inevitably incur fierce reactions and protests in the city [Hong Kong].  However, the central government’s determination would also change the expectations of pan-democratic groups… Some people have always had this delusion that the central government would not take aggressive and decisive measures as it is afraid of a public backlash in Hong Kong or US sanctions.”

And the target of Beijing’s hard line message goes beyond Hong Kong, reinforced, in no uncertain terms, in a meeting last Thursday convened by Xia Baolong.

A close confidante of President Xi Jinping, Xia is Vice Chairman of the CPPCC National Committee and the new Director of the Hong Kong and Macao Affairs Office of the State Council. He was accompanied in the meeting by Hong Kong Chief Executive Carrie Lam, to “inform and introduce” the draft national security law to all the Hong Kong members of the CPPCC (China People’s Political Consultative Conference).

According to a source who accompanied him, Xia allegedly said that over the past few years a series of social unrests and riots had demonstrated that Hong Kong has become “the latest battlefield for separatist forces,” including last summer’s “violent and illegal incidents spreading under the instigation of anti-China plotters and the interference of external forces such as the US,” and that  the US intention of using Hong Kong as a pawn to counterbalance China has become increasingly palpable.

“Obviously,” Xia predicted, “the US will then use the Hong Kong Human Rights and Democracy Act to challenge China.” But should there be any doubt about Beijing’s message, Xia also warned that the legislation would serve as a serious warning to Taiwan authorities as well, and to “other separatist forces overseas.”

Braced for a US Response

President Xi Jinping then personally chaired a meeting last Thursday of the Central Coordination Group for Hong Kong and Macau Affairs, accompanied by Han Zheng, Executive Vice Premier in Charge of Hong Kong and Macau Affairs. Participants included Xia Baolong and Carrie Lam, as well as formed Hong Kong Chief Executives, Tung Chee-hwa and Leung Chun-ying.

After promising that Hong Kong’s “high degree of autonomy would be ensured under the jurisdiction of China,” and that the legislation would “in no way harm the daily lives of law-abiding Hong Kong residents” or affect foreign investors’ legitimate interests in Hong Kong, Xi stressed that the central government had fully considered the reactions of the US and other Western countries before making their decision, and would take countermeasures when necessary.

Executive Vice Premier Han Zheng then predicted that while the US would rally its allies, most countries would not follow the US with any strong action against China.

And in anticipation of unrest in Hong Kong, Han laid out a timetable for passage of the proposal into law in which after the May 28 NPC vote on the draft Hong Kong national security law, the National People’s Congress Standing Committee would hold three meetings, including an interim meeting, to expedite signature of the bill into law as soon as in early August.

Conceding that it would be a blow to Hong Kong’s economy if the US were to revoke the status of HK as a separate customs territory, Han pointed to the threat to America’s “vital interests” as well if it were to respond, noting that 1,344 US companies had their regional headquarters in HK, that 85,000 US citizens work and live in the city, and pointing to a $30 billion trade surplus the United States enjoys with HK.

“We (China) have prepared a number of countermeasures,” Han continued, “including the investigation of extreme anti-China American politicians and a cutting of their ties with Chinese interest entities.”

President Xi on the New Cold War

Then on Monday, towards the conclusion of the Two Sessions, both President Xi Jinping and Premier Li Keqiang addressed all leaders from the provincial parties and governments, and principals from departments of the CPC Central Committee and the State Council.

After stressing the tough year China was facing economically and exhorting the nation to strive for a “hard-won” victory of a 6% GDP growth rebound for the second half of 2020, Xi turned to relations with the US and, mincing no words, accused the US of starting a new cold war against China.

Xi is then said to have called for a new development pattern where the “domestic cycle” [domestic market] plays a major role, and for a series of new measures as soon as possible to avoid “being choked by the US” in high technology.

And fully brushing aside political sensitivities with the Trump administration of the past, Xi then revived a push for Beijing to hit its “Made in China 2025” hi-tech goals.

Premier Li Keqiang is subsequently said to have told attendees that the central government has made numerous preparations for a potential showdown with the US in the areas of high technology, finance, trade, and geopolitics, among others.

Echoing the words of President Xi, Li listed the various fronts on which the Trump administration was waging “a new cold war” against China, including new sanctions on Huawei, crackdowns on US-listed Chinese companies, and threats of sanctions over national security legislation for Hong Kong.

China, Li said, has sufficient ways to “fire back and exert pain” in turn on the US, including action against US companies counting on China’s market, participating in the establishment and use of a Europe-initiated cross-border payment system, or working on a China-initiated “independent” cross-border payment system.

Li is allegedly even said to have included dumping China’s holdings of US dollar-denominate assets as an option, were the US to abolish or suspend the status of Hong Kong as a separate customs zone from mainland China.

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