Asia | China | Politics & Geopolitics | US
Bottom line: markets rallied on Friday’s Trump press conference on China as it turned out more a list of threats than actual actions and Trump did not announce that he was pulling out of the phase 1 trade agreement. But his distrust of China is a long held belief, and he is likely to make good on some of these threats in a manner that does not threaten long term market performance and supports his re-election prospects. So Chinese-US news are likely to remain a source of market volatility though not of broad-based performance reversal.
On May 27th, Secretary of State Pompeo certified that, following the adoption by China’s National People’s Congress of a new security law, Hong Kong no longer had a high degree of autonomy from China. The certification is required under the 1992 Hong Kong Policy Act that in practice gave Hong Kong more liberal economic, trade, technology transfer and immigration regimes than China after the 1997 handover. The Act, however, authorizes the president to withdraw this special treatment if the State Department certifies that Hong Kong is no longer sufficiently autonomous from the mainland.
Following Secretary Pompeo May 27th de-certification, President Trump on Friday announced a series of measures:
Chinese graduate students or researchers who work or have worked at entities associated with the Chinese military will be barred from entering the US. Those already in the US could have their visas revoked.
The president’s financial markets working group is to study the practices of Chinese companies listed on US markets, to “protect US investors”.
The administration is to begin the process of eliminating Hong Kong’s special policy exemptions, including extradition treaty, controls on exports of dual use technology, customs and travel.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Bottom line: markets rallied on Friday’s Trump press conference on China as it turned out more a list of threats than actual actions and Trump did not announce that he was pulling out of the phase 1 trade agreement. But his distrust of China is a long held belief, and he is likely to make good on some of these threats in a manner that does not threaten long term market performance and supports his re-election prospects. So Chinese-US news are likely to remain a source of market volatility though not of broad-based performance reversal.
On May 27th, Secretary of State Pompeo certified that, following the adoption by China’s National People’s Congress of a new security law, Hong Kong no longer had a high degree of autonomy from China. The certification is required under the 1992 Hong Kong Policy Act that in practice gave Hong Kong more liberal economic, trade, technology transfer and immigration regimes than China after the 1997 handover. The Act, however, authorizes the president to withdraw this special treatment if the State Department certifies that Hong Kong is no longer sufficiently autonomous from the mainland.
Following Secretary Pompeo May 27th de-certification, President Trump on Friday announced a series of measures:
- Chinese graduate students or researchers who work or have worked at entities associated with the Chinese military will be barred from entering the US. Those already in the US could have their visas revoked.
- The president’s financial markets working group is to study the practices of Chinese companies listed on US markets, to “protect US investors”.
- The administration is to begin the process of eliminating Hong Kong’s special policy exemptions, including extradition treaty, controls on exports of dual use technology, customs and travel.
- China and HK officials “directly or indirectly involved in the eroding of Hong Kong’s autonomy” could be the object of sanctions. Earlier last week the State Department issued a list of individuals who could be sanctioned.
- The State Department will revise its travel advisory for Hong Kong to reflect “increased danger of surveillance and punishment by the Chinese State security apparatus”.
- The US is permanently pulling out of the WHO as according to Trump, “China has total control over the organization”. In April Trump had suspended US contributions to WHO.
Friday’s announcement was more a series of threats than real actions, yet. The only actual sanctions, a change in the State Department travel advisory to Hong Kong, as well as the US pulling out of the WHO, are likely to be of limited concern to the Chinese authorities. In addition, the president did not announce that he was pulling out from the first phase trade agreement concluded with China in January. This could explain the positive market reaction, after Trump had announced unspecified sanctions on China earlier in the week.
But it is likely the president will follow through on some of those threats as:
- His distrust of China is one of his few consistent beliefs: Trump has long held mercantilist views on the US deficit with China and criticized the country for intellectual property theft.
- China bashing has become a core plank of Trump’s re-election campaign after the coronavirus upended his plans to run on his economic record. Trump views China-bashing as a way to reach beyond his traditional base, especially as US public opinion view of China is at a historical low.
- The removal of Hong Kong special status will have only a limited impact on the US economy as Hong Kong is a small trading partner for the US: US exports to Hong Kong represent only 2% of the total and the US trade surplus with Hong Kong represents about 0.1% of US GDP.
So far the reaction of mainland and HK government officials has been to warn the US not to interfere in China’s internal affairs. They also hinted that US business interests in Hong Kong could be the objects of retaliations.
The most likely scenario seems to me that Trump will continue to apply pressure on China, including through implementing some of the measures mentioned Friday but in such a way as to limit their market impact. Trade negotiations are likely to continue while the US imposes sanctions linked to human and intellectual property rights abuses. In addition, we are likely to go through renewed financial-diplomatic cycles where Trump puts pressure on China, US markets sell off significantly, and Trump announces a compromise. At the same time the US is likely to pursue vigorously the reshoring of activities deemed key to US national security. The next step could well be the implementation of the least aggressive of the threats listed by Trump on Friday, for instance a very public cancellation of the visa of Chinese scholars involved in research at US universities.
China will feel bound to respond in kind, as Xi is likely under pressure domestically over the coronavirus epidemic and its economic impact. In addition since the coronavirus China has taken a more confrontational stance on the global scene. It is however in both parties interest to stop short of measures that would be destabilizing for the global economy. So Chinese news are likely to remain a source of market volatility though not of a broad based performance reversal.
Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)