Hong Kong: Beijing’s October 1 Deadline

Published on August 12, 2019

China’s annual National Day celebrations this October 1 will be of particularly symbolic importance to the country and leadership in Beijing this year in that they will commemorate the 70th anniversary of the founding of the People’s Republic of China by Mao Zedong.

*** Senior officials in China are “full of confidence” that calm will be restored to the Hong Kong Special Administrative Region (SAR) before then, the National Day celebrations beginning October 1. ***

*** More ominously, we interpret that to mean Beijing will ensure order is restored in Hong Kong, perhaps well before then, through forceful and direct intervention if need be, assuming the demonstrations do not burn out as had been hoped for in Beijing. ***

*** In anticipation of continued unrest in Hong Kong, Premier Li Keqiang recently gave a series of instructions to financial officials to manage the crisis in HK. From what we understand, Li instructed China’s top financial officials to ensure the “basic stability” of Hong Kong’s financial markets, especially the foreign exchange and stock markets, to “resolutely crack down on speculative forces that short the Hong Kong Dollar, and to resolutely defend Hong Kong’s linked exchange rate system.” ***

In response, the People’s Bank of China dispatched a working group to Hong Kong for an eight-day visit to implement Li’s directives, headed at the vice-governor level.

Defending Hong Kong’s Markets

But Beijing officials are under no illusion that the political stress, and with it the stress on Hong Kong’s financial markets, will disappear in the very near term. And with the October 1 celebration looming, we believe that dramatically raises the probability of intervention from the mainland.

Persistent street violence, they note, has already caused Hong Kong’s stock market to plunge and put pressure on the HK Dollar. And undoubtedly, they concede, the ongoing massive protests have already damaged Hong Kong’s reputation as an international financial center.

The benchmark Hang Seng equity index has plunged by almost a full 10% in the last half month alone, and until the political situation stabilizes, could fall further to the 24,000 area before it can truly be stabilized.

Likewise, the HKD has depreciated from roughly 7.81 to below 7.84 to the US Dollar in the same period. But while the currency has approached dangerously close to its “red line” level of 7.85, the Hong Kong Monetary Authority has to date kept their interventions limited.

Were the unrest to continue, however, the HKD would be almost certain to hit the 7.85 level repeatedly, and the HKMA would intervene repeatedly as it has done in the past.

And lest that message be lost, PBoC officials emphasize that no matter how the situation in Hong Kong evolves, “the HKD will never fall below 7.85, and the linked exchange system will not collapse.”

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