Hong Kong and the Nasdaq
EDITOR'S NOTE
While the whole world is distracted by the coronavirus pandemic--which itself originated in China--China has been cracking down even further on democratic freedoms in Hong Kong.
First there were the arrests. "Rarely have so many prominent pro-democracy figures--over a dozen--been arrested at once," The New York Times reported last month. That article ran on April 18, and it looks like April 14 was the height of the Covid crisis in the U.S., based on when TSA passenger travel bottomed out.
"The arrests reflect an assessment by Beijing that protests in Hong Kong over the past year pose such a threat to national security that it is worthwhile to defy American threats of retaliation if a crackdown takes place," one expert told the Times.
Note that China's only apparent hesitation over the move was concern that the U.S. might retaliate. Not Europe; not Britain, with whom they originally struck the Hong Kong handover treaty; not Russia; not the United Nations. Only America stands as a legitimate countervailing force against what one Taiwanese politician calls"China's all-out war on the liberal order [which] is just getting started."
And by "China" he (and I) specifically means the CCP, the ruling Chinese Communist Party, not the billion-plus Chinese people under its rule.
We had China expert Patrick Chovanec of Silvercrest on the show yesterday, and he said the coronavirus pandemic has accelerated a bipartisan shift towards viewing China as an enemy. We see this in the rhetoric of Joe Biden and other Democratic leaders, who are nearly as tough as President Trump on China, if not tougher in some cases.
This must be very difficult for CEOs (of companies small and large) trying to figure out what to do about their business relationships in China. Some depend heavily on Chinese customers; others rely on China's supply chain. But they're in a very awkward situation trying to navigate an increasingly icy relationship between the two nations.
And just as experts warned after the Hong Kong arrests last month, China's move did signal "an early step toward a broader crackdown by Beijing on the Hong Kong opposition." Yesterday, China in a surprise move announced sweeping new laws to "prevent and punish secession, subversion, and foreign infiltration" in Hong Kong. The Hong Kong stock market tanked 5% overnight.
Now, traders like Robert Francello are watching the Hong Kong-U.S. dollar peg, which is showing signs of strain in forward markets, where the currency weakened the most since 1999 overnight. The HK dollar, which has been pegged for almost four decades, trades between 7.75-7.85 per $1. Should it break the peg because of panicked outflows out of Hong Kong, Francello and others worry about a repeat of the late-1990s financial panic sparked by Asian markets.
"The United States has until the end of this month to assess whether Hong Kong remains suitably autonomous from China," notes the South China Morning Post, and if the U.S. decides it is no longer so, it could end "the city's preferential trading and investment privileges with U.S. businesses"--essentially, undermining the entire Hong Kong economy. Hence the jitters in stock and currency markets.
Senator Marco Rubio warns that "China's Communist Party is breaking its international commitments to respect Hong Kong's autonomy & democracy." The real question is what the U.S. would do about it. Beyond stripping Hong Kong's "special status," note also the recently introduced legislation to de-list Chinese stocks from American exchanges, which appears to have backing from the Democratic-led House and could become law within days.
What will China do in response? That's the other key question. Traders are speculating over whether the CCP would encourage Chinese citizens to curb spending on U.S. goods--think Apple iPhones. "A perfect storm brewing for Nasdaq stocks? We'll see," says Francello, pointing as well to the possible end of the stay-at-home trade that has been boosting internet stocks to new all-time highs.
On top of all that, the June 4th anniversary of the Tiananmen Square massacre looms. It could be a very hot summer for U.S.-China relations.
See you at 1 p.m...
Kelly
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