Hong Kong is experiencing a deepening crisis, which could have significant geopolitical impact. Its outcome will play into the U.S.- China relationship, prolonging the uncertainties about the two competing powers achieving a trade deal and therefore perpetuate the ‘tariff wars’ that have been threatening the global economy. At the time of writing, the Federal Reserve – and not without some pressure from the White House – is pondering a further rate cut, while Trump is pondering an additional tax cut in order to stimulate growth. These are hardly solutions – they are perpetuators of ambiguity. However, the Hong Kong crisis is a ‘paper tiger’. It does not have the foundations to achieve anything beyond temporary and random disruption. The bigger threat comes from the White House and how it chooses to react to trade and monetary developments. Either way, it’s looking good for gold investors in the next few months.
China, U.S. Tariffs and the European Central Bank
China still has a massive trade surplus with the United States. It reached a record $420 billion (2.1 percent of GDP) as of 2018. And in the first six months of 2019, it reached some $170 billion (Source: U.S. Census). Yet, the Trump Administration has imposed duties of 25% on $250 billion Chinese products. On September 1, a 10% tariff will apply to an additional $300 billion worth of goods. Trump has shown some ‘reasonable’ hesitation, delaying the enforcement of more duties on some goods until December 15. The logic there, and not a bad one, is that adding tariffs on consumer goods simply makes the lives of ordinary Americans more expensive – and 2020 is an election year after all. If there’s a lesson that future textbooks will impart from the Trump experience, it’s that imposing duties in the context of an interconnected global economic system is a double-edged sword or a gun with barrels at both ends: all opponents end up being injured. And, then there’s Europe.
It’s more than a rumor that European Central Bank (ECB), given the slowdown of the German economy and the risks of a Deutsche Bank fueled banking crisis, is considering charging up the old economic stimulus howitzer to fire a shot of more monetary stimulus, combining interest rate cuts and feeding the bond-buying frenzy. Just as Trump has accused China of manipulating the Yuan, he will accuse the ECB of doing the same. And then, just in time for election season, the U.S. President will start to impose tariffs on European cars and foods and so on, while also insisting for more rate cuts to prevent the U.S. Dollar rising against a cheaper Euro and to help sustain the casino like investment patterns on Wall Street. After all, all the tariff, interest rate, currency manipulation, China bashing ultimately represents little more than a cover-up for the fact that since 2011, stock valuations have doubled while corporate profits have stayed the same.
The Hong Kong Protests and Why They’re Doomed to Achieve Nothing
Such is the stage upon which the Hong Kong protests are playing. The geopolitical and macroeconomic dangers derive from how China plans to react. It’s clear, the protests are and never were about the extradition Law. That was a mere trigger or excuse. The crisis began, as so many do, with ‘a butterfly flapping its wings and causing a hurricane many miles away’ type of incident: a Hong Kong resident committed a crime. He killed his girlfriend in Taiwan in 2018 and then took refuge in Hong Kong and, thanks to the absence of related legal provisions, the man could not be extradited to face trial. To correct this situation, authorities in Hong Kong adopted a measure to allow extradition of suspects to Taiwan and any other government with which it did not have an extradition agreement. One such government was, and remains, mainland China. In June, Hong Kong Governor Carrie Lang shelved the extradition bill, but the activists have raised the bar. By then, the protests had snowballed into the biggest challenge that Hong Kong ‘dissidents’ have ever staged against mainland China by dissidents.
They now demand greater democracy in the territory, even going so far as to ask for independence, having blocked the entrance to Hong Kong’s Chek Lap Kok Airport, forcing the cancellation of hundreds of flights in August. However, as vociferous as the protesters have been, the majority of Hong Kong citizens see them as having been excessive. The protests have not succeeded in generating a ‘critical mass’ – at least not yet. One important factor is that unlike many protest contexts, which usually involve a deep and persistent degradation of living conditions, the private sector has thrived in the past few years; whereas, the protests have caused business activity to collapse. Not since the 2003 SARS epidemic or the 2008 Financial Crisis has commercial enterprise suffered as much in Hong Kong. The IHS Hong Kong purchasing managers’ index (Source: Financial Times), which measures the intensity of private sector activity in the area, fell further to 43.8 in July from 47.9 in June, the sharpest decline since March 2009. (Any number below 50 represents a contraction).
Beijing Will Not Send the Tanks
The protesters in the former British colony – and former Hong Kong British colonial flags have been brandished about – are demanding an unclear set of changes, which add up to more freedom and autonomy – without specifics. They lack a leadership with whom, Hong Kong or Beijing officials might even attempt some form of dialogue or negotiation. Still, the protesters may have unwittingly set the scene of Hong Kong’s own demise by forcing Beijing to face a problem that is more than complex; it’s existential. Should it keep Hong Kong independent and autonomous and wide open to the West? Or should it accelerate territorial integrity, adopting a harder line and putting more pressure on Taiwan as well. Many fear the latter, expecting a repeat of Tiananmen Square in June 1989 with images of defenseless civilians facing off tanks. This option would fuel geopolitical tensions and worsen the U.S. – China trade and tariff disputes, making any practical and mutually agreeable solutions impossible. Therefore, as much as the mainstream media would welcome the opportunity to report another ‘Spring’ in the making, after the ones in the Middle East have failed to improve anything – with the possible exception of Tunisia – China is not about to deploy tanks and warships in Hong Kong just yet.
Doubtless, Hong Kong has become another lever to pull in the Cold War, heating up between China and America. Beijing has already made it clear; it believes there are US and UK interfering hands behind the protesters, citing photographic evidence of meetings between US Consulate personnel with activists. Nevertheless, the Chinese are not about to place all their bets on Hong Kong. In other words, they won’t risk global economic catastrophe – they understand that China’s growth depends on the rest of the world being able to thrive as well. Moreover, China doesn’t need Hing Kong – it’s more the other way around.
China once needed Hong Kong to serve as its intermediary with the global financial system. Foreign companies operating from the territory had the managerial experience and contacts to access international markets. Hong Kong also boasts an impressive port. In 1997, when London handed its former colony back, Hong Kong’s economy accounted for almost 20.0% of China’s. Today, that percentage has dropped to three percent at best. (Source:Vox). And Hong Kong’s role has changed from giving Beijing access to foreign markets to raising capital for Chinese companies. Chinese cities have squeezed Hong Kong, replacing it as a main hub for foreign multinationals, which have chosen to move their headquarters to Shanghai. Hong Kong remains a financial hub, but its future may have more to do with acting as a platform to trade Chinese Yuan and access point for investors to China than the (apparent) independence aspirations of the protesters would suggest. Indeed, the media have focused too much on the protests’ apparent anti-Chinese inspiration and too little on the economic disparity that exists in Hing Kong itself. Many residents, even well employed ones, cannot afford housing and administrators have fueled the real estate crisis by blocking new construction in areas of the territory.
Shenzhen is the New Hong Kong
As for the tanks and military intervention, yes, Beijing’s central authorities are worried. They may be willing to offer concessions, but have no guarantees these would be accepted, given there is no official leadership behind the protesters – who also keep moving the ‘goal posts’, changing demands and tactics. But China will be celebrating 70 years of Communist leadership on October 1 and it wants the issue resolved without bloodshed or the image of military might. Beijing might be more willing to compromise than the media would suggest with its Tiananmen Square associations. Hong Kong is simply not worth the risk. It may remain a strategic pillar of the economy, but just across the strait is Shenzhen, a Mainland city, which has become far more important in recent years. Shenzhen is the alternative to Hong Kong. And the protests have merely helped make it fundamental from Beijing’s perspective. Chinese authorities have become even more determined to make Shenzhen the technology and finance hub of China by 2050 and it enjoys special economic zone status. It’s no wonder that China’s main technology giants, from Tencent to Huawei are based in Shenzhen. Therefore, the Chinese leadership, which plays the ‘long game’, will not send the military to Hong Kong, gambling away its future. Without a clear leadership, the protesters will fizzle out as the Yellow Vests have done in France. They will certainly represent failed policies and growing economic discontent. Yet, they will not succeed in achieving a hegemonic influence, able to spark tangible political changes. In fact, if the protesters don’t change tactics, seeking dialogue and compromise, they will end up hurting Hing Kong far more than the Chinese Army could ever hope to do.
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