China’s legislature has taken preliminary steps to impose greater national security control over Hong Kong. These efforts would override the territory’s partial autonomy in order to crush anti-Beijing protests. For several years, the tensions between Beijing and Washington have escalated over the global COVID-19 pandemic, technology disputes and competition for global dominance. Sharp differences on how to treat Hong Kong might be the “straw that breaks the camel’s back.” On CNBC, Stephen Roach, former chairman of Morgan Stanley Asia, described the relationship as a “cold war.”
Our relationship with China has deteriorated badly since we signed a preliminary trade deal four months ago. China has not fulfilled their agreement to purchase hundreds of billions of dollars’ worth of additional American goods.
President Trump announced that America would “begin the process” of ending our special relationship with Hong Kong. He approved a “variety of sanctions.” Even the “nuclear option” is on the table. This would remove Hong Kong’s status as a region separated from the Chinese mainland. This decision would leave the city vulnerable to trade war tariffs, technological export controls, visa and travel restrictions, and greater financial sector insecurity.
Until now, Hong Kong possessed a unique status. They were “under one country; however, they enjoyed two systems.” In brief, Hong Kong enjoyed liberties unavailable on the mainland such as freedom of expression and an independent judiciary.
Because Hong Kong enjoyed freedom, it has earned a special status internationally, allowing it to negotiate trade and investment agreements independently from Beijing. For example, Hong Kong does not pay the tariffs that the United States imposes on Chinese imports.
The possibility of China interfering more in Hong Kong’s affairs could prompt global investors to seek other low-tax financial centers with highly respected legal systems, such as Singapore.
Beijing is expecting an international storm over its proposed legislation. The U.S., United Kingdom, Australia and Canada issued a joint statement expressing “deep concern” regarding Beijing’s proposed law. Japan and Taiwan have expressed similar reservations.
Since 1997, Hong Kong’s share of the Chinese economy has shrunk from 18.4% to 2.7% of the mainland. Nevertheless, Hong Kong’s importance surpasses its pure financial importance because it possesses a world-class financial and legal system.
Historically, Hong Kong has served as a gateway for global capital flowing into China. Because it is one of the most open economies in the world, Hong Kong is a premier financial center. In comparison, China has extensive capital controls and often intervenes in its financial markets and banking systems. In order to attract capital, China used Hong Kong’s currency, equity, and debt markets to attract foreign funds.
In 2019, Chinese companies raised $64 billion globally. Hong Kong is the home of more than half of the listings. The “Stock Connect” link between China’s mainland markets and the Hong Kong Stock exchange allows foreigners to buy China shares listed on the mainland in a less restricted manner.
Hong Kong’s port handles a large share of China’s exports and imports. As an independent entity, Hong Kong is China’s largest trading partner with a market share of more than 20%, topping the U.S.’s 17%.
Stephen Roach authored a book: “Unbalanced: The Codependency of America and China.” Roach wrote that China and the U.S. economies became attached because of mutual benefits. However, over time, the relationship has soured. China now poses a threat to America’s military, diplomatic and economic hegemony. Roach argued that the benefits to both countries outweigh their competitive concerns.
Over my lifetime, I have enjoyed the good fortune of visiting almost all of the world’s greatest cities. Each one possesses unique charms. Hong Kong is New York City on steroids. Its vitality is infectious. Losing its pulse would be tragic.
