China: “Equivalent Retaliation” for US Hong Kong Act

Published on November 22, 2019

Our understanding is that both China’s President Xi Jinping and US President Donald Trump remain keen on keeping political tensions over Hong Kong on a separate track from ongoing negotiations towards the “Phase One” trade deal between China and the US.

But that is becoming increasingly difficult after the faster than expected, bilateral, bicameral, near-unanimous passage of the “Hong Kong Human Rights and Democracy Act” by Congress, which is expected to be imminently signed into law by President Trump.

*** If Trump indeed signs the bill, which we think likely, our sources in China say Beijing will immediately take “equivalent retaliatory measures,” which could include a “blacklisting of certain anti-China US lawmakers, and a rigorous review of some US companies and individuals with business in Mainland China and Hong Kong SAR.” ***

*** But the timing and precise response from Beijing will depend on how Trump implements the bill. The Hong Kong bill calls for an annual State Department review to certify Hong Kong’s special trading status, depending on the level of autonomy it enjoys from Beijing, but it also allows for immediate sanctions and asset freezes on officials seen to be responsible for human rights violations in Hong Kong. ***

*** Importantly, the Hong Kong Bill leaves ultimate discretion on implementation to the President to factor in US national security interests as well. And that implementation, most importantly if any sanctions are put on, will be what Beijing will be watching most closely, and will react to most forcibly. If President Trump were to veto the bill, sources in Beijing assert they could work towards speedy passage of a Phase One trade deal, “on a relatively fair basis,” for December or January. ***

*** But, under intense pressure from Congress, the prospect for a Trump veto looks unlikely,  and that, we believe, makes a delay on a trade agreement into next year that much more likely. Indeed, Chinese security sources estimate that it may still take up to three months to restore the situation in Hong Kong to “normal”…and that is if everything goes right for Beijing. ***

Unprecedented Protests to Washington

Meanwhile, Chinese officials, unsuccessfully, lodged an unprecedented number of official protests over the last few days to stem the gathering momentum in Washington for passage of the Hong Kong bill, with a wary eye on the growing support on Capitol Hill for the protest movement in HK.

Those protests hit fever pitch after Republican Senate Majority Leader Mitch McConnell green lighted the Senate version of the HK bill that had already been passed in the Democratic-controlled House of Representatives for a Senate floor vote, which led ultimately to speedy passage of a parallel bill in the upper chamber on Tuesday.  

All in all, seven Chinese authorities condemned the US bill – The National People’s Congress, the National Committee of the Chinese People’s Political Consultative Conference, the Ministry of Foreign Affairs, the Hong Kong and Macao Affairs Office of the State Council, the Liaison Office of the Chinese Central People’s Government in the Hong Kong Special Administrative Regions (SAR), the Office of the Commissioner of the Chinese Foreign Ministry, and the Hong Kong SAR government itself.

Lest the message be lost, the Chinese Foreign Ministry also summoned a senior US Embassy official on Wednesday to lodge its “strong protest.”

But perhaps most relevant to investors in the near term, for all the efforts to keep the Hong Kong and trade issues on separate tracks, from what we understand, the Chinese trade negotiating team also conveyed to the US side that the fate of China-US trade negotiations depends “entirely” on whether and how the Trump administration enforces the measures.

A Message from Xi

With the unfolding events in Hong Kong and Washington in mind, President Xi Jinping also told very high-level Chinese officials yesterday that it is clear the US wants to play “the Hong Kong card” to contain China, and that China will resolutely respond.

If, he went on, the US were to deliberately undermine Hong Kong’s free trade market status, China would then need to make the US pay a heavy price in return. But so far, he noted, Trump has kept silent on the bill.

Passing the bill will surely weigh on the ongoing trade talks, he warned, and reviewing or even revoking the special trade status of Hong Kong will hurt trade relations as well, even in so far as much of the bilateral Sino-US trade activity goes through that port and financial center.

And while Beijing now believes by and large that Trump will use both the Hong Kong bill and a Xinjiang Uyghur human rights bill as bargaining chips in its trade negotiations with China, President Xi concluded, simply, that he hopes Trump can make “the right decision” in the end.

The Fate of Hong Kong

In the long run, officials in Beijing believe the passage of the Hong Kong bill will have far graver consequences for the territory than as just a pawn in the immediate US-China trade wars.

The passage of the Hong Kong bill will give Trump leverage in US negotiations with China, but it will also, in one high-level official’s words, “weaken Hong Kong society’s consensus and determination to end the current chaos and violence in the city.” Some of his more hawkish colleagues would maintain that is exactly Congress and the Washington foreign policy establishment’s intent.

In the beginning, the consequences of the mere passage of the bill may be muted, as the Trump administration has flexibility in its implementation, and in return China will refrain from drawing up an immediate blacklist.

But, this official adds, the passage of the bill means US interference in China’s internal affairs has escalated, and that Washington’s presumed “Hong Kong card” has come to be an integral part of the US anti-China strategy. US interests in Hong Kong, he warns, will, however, be jeopardized in the process, as well as US investments in the Mainland that are channeled through Hong Kong.

With the passage of the bill, and with it, new uncertainties over Hong Kong’s financial status now annually enshrined by the US, it is inevitable that subtle changes will take place in Hong Kong’s international business environment, that US investors will choose to pull back, and that Hong Kong’s geo-economic status and function will, at a minimum, be re-evaluated by all.

Clearly, the bill will speed up Shanghai’s replacement of Hong Kong as an international financial center (a long-held goal of Beijing’s).

Originally, this official concludes, his estimate was that Shanghai could surpass Hong Kong as “the most important financial center in the East” in fifteen years. Now, he estimates that will happen in less than ten. 

 

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