Hong Kong must handle two major risks decisively
US President Donald Trump lost no time in threatening China, including the Hong Kong Special Administrative Region, with an assortment of sanctions after the National People’s Congress passed a decision asking its Standing Committee to enact a law on safeguarding national security in the special administrative region over a month ago. Some people in Hong Kong openly begged Washington to target the Chinese mainland this time and spare Hong Kong because the latter had “no say” over the national security legislation. And they suggested that by doing so, the US could pit the central government against the Hong Kong SAR more effectively. However, their pleas fell on deaf ears, as the US president went ahead with sanctions against Hong Kong as well as the Chinese mainland. The decision indicates Washington is convinced it can no longer use Hong Kong to sabotage China willfully.
It so happened the US government announced on June 29 it would halt the export of U.S.-origin defense equipment to Hong Kong immediately; require individual permits from the US Department of Commerce to export dual-use technology to Hong Kong; and revoke special treatment for Hong Kong in foreign trade by suspending some laws authorizing such special treatment for Hong Kong, including export license exceptions, while assessing the possibility of further sanctions.
Meanwhile, many US states are reporting a second surge of the COVID-19 pandemic, which is also aggravating the country’s economic recession. Figures released by the US Labor Department on June 5 showed a surprising rebound in nonagricultural jobs in May, a whopping increase of 2.5 million from the month before, as opposed to market predictions of up to 8.3 million jobs lost because of the pandemic; while the unemployment rate came down to 13.3 percent in May from 14.7 percent in April. As a result, some pundits were looking forward to a “V-shaped” rebound of the US economy. That dream, however, was short-lived, as a correction issued by the Labor Department put the May unemployment rate at 16.3 percent and blamed a “classification error” for the 3 percentage point discrepancy. It also means the unemployment rate in April should have been about 19.7 percent instead of 14.7 percent before the error was discovered. On June 10, the Federal Reserve Board decided to keep the federal funds interest rate in a movement band between zero and 0.25 percent until the end of 2022, indicating the US economy will remain sluggish in the next two years at least.
The COVID-19 pandemic is still spreading around the world, as much of Europe, Japan and South Korea are seeing a second surge after a short period of subsidence. On June 24, the International Monetary Fund adjusted its global GDP forecast of this year downward again after the previous one in April, from a drop of 3 percent to 4.9 percent, with the US GDP expected to decrease by 8 percent, a downgrade of 2.1 percentage points from its April forecast.
These negative developments will no doubt add to a pair of risks facing Hong Kong. One is that the SAR may find itself in a structural fiscal deficit sooner rather than later. The HKSAR government, already dealing with a deep recession, has taken unprecedented policy measures to keep Hong Kong’s economy relatively stable and the employment rate relatively healthy. If the recession continues in the second half or even longer, it may turn into an economic depression, which is why the SAR government’s employmentboosting measures will very likely remain in effect, such as the emergency bailout measures to save Ocean Park and Cathay Pacific Airways. And more companies could be added to the rescue list, putting more pressure on the city’s financial reserves. In case the city’s public finance does run into a structural deficit sooner rather than later, the government and society must be fully prepared to handle it without panicking.
Evidently, the financial risks facing Hong Kong are also intensifying. US Treasury Secretary Steven Mnuchin said recently the sanctions against China will very likely include restricting capital flow to the Hong Kong market. The Hong Kong Autonomy Act will allow the US government to level sanctions against financial institutions that refuse to take orders from it, meaning finance could be a key battlefield for Washington to advance its China containment strategy in the near future.
Some people believe targeting Hong Kong with various sanctions will hurt US national interests as well as thousands of American businesses, which is why Washington will think twice before firing those shots. What they fail to realize is that both the Republican and Democratic parties are generally willing to pay such a price to stop China from becoming stronger.
The SAR government and Hong Kong society must fully understand the US will stop at nothing to beat China down, and for Washington, there is no fair play or compromise with the latter. The fact that Trump has repeatedly threatened in recent years to decouple from China if he has no other tools is evidence enough the current US administration is more desperate than most people realize. Although it is technically impossible for the US to completely decouple from China, Washington will do anything possible to push China to the edge of the world order of its design. For instance, the US may try to shut China out of the US dollar clearing system in international trade. If so, China may have to convert its renminbi into a third sovereign currency or the euro in order to settle deals in US dollar. Extreme as the idea may sound, it is possible for Washington to make that move after the presidential election in November, and whoever wins will make no difference.
The SAR government can insist the US dollar peg won’t be changed, but it must have a Plan B just in case. Hong Kong’s only strategic response to these twin risks is to accelerate its integration into the overall development of the country, particularly the Guangdong-Hong KongMacao Greater Bay Area.
Zhou Bajun The author is a senior research fellow at China Everbright Holdings. The SAR government can insist the US dollar peg won’t be changed, but it must have a Plan B just in case. Hong Kong’s only strategic response ... is to accelerate its integration into the overall development of the country, particularly the Guangdong-Hong KongMacao Greater Bay Area.