More isolation?
Hong Kong trade at risk due to Us-china friction
China’s sweeping plans to strip Hong Kong of democratic autonomy sound the “death knell” for the enclave’s special trading and financial status and will have grave economic consequences for China itself, Washington has warned in a dramatic shot across the bows.
The draft law bans “treason, secession, sedition and subversion” in Hong Kong, eviscerating the zone’s “One Nation, Two Systems” status and violating the Sino-british Joint Declaration of 1984, a commitment lodged at the United Nations.
Mike Pompeo, the US secretary of state, said that if Beijing presses ahead with the “disastrous proposal” and openly flouts its international treaty obligations, the political dam will break in Washington. The US will be forced to revoke Hong Kong’s unique privileges: the essential legal exemptions that allow it to function as a global hub.
The escalating showdown between the two global superpowers has begun to rattle financial markets. The Hang Seng index tumbled 5.6pc and the Shanghai Composite was off almost 2pc. Brent crude fell 4pc.
The “Cold War” clash overshadowed the announcement of a massive Chinese stimulus plan yesterday, equal in economic scale to the post-lehman credit boom in 2009.
Premier Li Keqiang rolled out a fiscal package of bonds, loans and direct spending worth more than 4pc of GDP and vowed to open the monetary floodgates, hoping to turbocharge recovery from Covid-19. But China’s structural problems run much deeper than they did a decade ago and hidden unemployment risks becoming a curse.
Bowing to the inevitable, Mr Li dropped the annual growth shibboleth for the first time in the modern era, a figure universally disbelieved by investors in any case. “We have not set a specific target this year. Our country will face factors that are difficult to predict due to the pandemic and the world trade environment,” he said.
It is a symbolic moment, an admission that the era of artificial uber-growth is over. Global commodity markets can no longer count on breakneck Chinese demand.
Chris Patten, the last governor of Hong Kong, said the draft security law is a “comprehensive assault” on the rule of law and fundamental freedoms of Hong Kong agreed in the Joint Declaration. “At best, the integrity of ‘one country, two systems’ hangs by a thread. Unless the Chinese Communist regime sees sense, this will be hugely damaging to Hong Kong’s international reputation and to the prosperity of a great city.”
The move renders de jure what has already been happening de facto. Bill Bishop, from Sinocism, said hardline party cadres installed last year to crush the enclave’s democracy movement have been arresting dissenters and operating beyond restraint.
What markets fear is the volcanic response from Washington, where Donald Trump last week threatened to “shut down” the whole economic relationship with China. While investors have learnt to discount the president’s outbursts on Twitter the political waters are becoming more treacherous. Mr Trump seems to have concluded his best shot at re-election – perhaps his only shot – is to blame China for deceptively unleashing the coronavirus on the world. Far from restraining him, Congress is demanding tougher action.
Cold War fever on Capitol Hill is bipartisan. Democratic speaker Nancy Pelosi said the crackdown on Hong Kong cannot be allowed to stand. Congress teed up action with the Hong Kong Human Rights and Democracy Act last November, obliging the State Department to certify each year whether China is in compliance with the Sino-british accord. If Hong Kong is no longer deemed sufficiently “autonomous”, the enclave would no longer be recognised by Washington as an independent member of the World Trade Organisation. It would be treated like any other Chinese city and face the same tariffs. There is now a mounting likelihood that this will be activated.
“Hong Kong’s future as a global city is in doubt,” said Mark Williams from Capitol Economics. Loss of US recognition would be a body-blow to the city’s status as a global financial entrepot. “Without autonomy and an impartial legal system, Hong Kong risks being eclipsed by Shanghai in finance and other mainland ports in trade and logistics.”
The 1,400 US companies operating there would drift away, many to Singapore. So would the 650,000strong army of foreign residents. The bustling enclave would risk the sort of steep decline that has befallen so many trade and banking centres over history – Venice, Antwerp, or Amsterdam – when political shifts robbed them of their unique advantage.
US sanctions – or more accurately, loss of privileges – would hit 13pc of Hong Kong’s GDP (including re-exports) and come when the tourist industry is on its knees. The economy contracted 8.9pc in the first quarter.
Mr Williams said optimists have long assumed that China benefits too much from Hong Kong’s current status as an investment and technology gateway to risk jeopardising the arrangement. Two thirds of foreign direct investment flows into mainland China through the enclave. It now appears that Beijing is willing to pay that high price in order to contain the bacillus of democracy.
China is taking a huge political risk with its ultra-nationalist “wolf warrior” diplomacy, breaching treaties and threatening countries around the world with rhetorical echoes of the Thirties. It is also a huge economic risk because China has not yet broken definitively out of the “middle income trap” and is badly overextended. The International Institute of Finance estimates that China’s debt-to-gdp ratio hit a record 317pc in the first quarter. The potency of new credit has been falling for a decade and productivity growth has been slipping.
While the official unemployment rate is around 6pc, Capital Economics says the true figure is nearer 15pc. A fifth of the country’s 300m strong migrant workers have yet to return from their villages. There are not enough jobs.
The risk for China is that it will accelerate the demise of globalisation. It risks a further “reshoring” of manufacturing plants and undermining the export development model. The Silk Road may impress the gullible but it is viewed as a farrago of mercantilist nonsense by global economists.
Ironically, China may be making the same hubristic mistake as Tojo Japan: overestimating its own strength, and underestimating the resolve of the dishevelled and unruly democracies.
‘Without autonomy and an impartial legal system, Hong Kong risks being eclipsed by Shanghai’