I have received quite a number of emails from readers and thought that I should just share my thoughts on the matter in public, as I do believe this would probably be at the top of most investor’s minds.
With the COVID-19 pandemic being largely under control in Hong Kong, protestors are starting to come out once again. This resulted in China announcing a National Security Law for Hong Kong on 21st May 2020. This resulted in further unrest and triggered fears of a ‘cold war’ between USA and China. Furthermore, given such fears and uncertainty, we saw the Hang Seng Index falling 5.6% on Friday.
In today’s article, I wanted to share some facts and figures on Hong Kong amidst this rising geopolitical tensions between the US and China.
What is Hong Kong’s Special Status?
Before Britain handed control of Hong Kong to China in 1997, a ‘one country, two systems’ deal was forged to ensure that Hong Kong was able to maintain certain freedoms and autonomy. Such freedom included a free market economy, an independent judiciary, free speech and legislative autonomy.
As such, US policymakers agreed to continue treating Hong Kong as a separate trade entity from mainland China beyond that handover date, resulting in the United States-Hong Kong Policy Act of 1992.
This meant that Hong Kong operates as a separate customs territory to mainland China. As a free port, it has no tariffs charged on the import or export of goods.
US Trade Surplus
The removal of the special status could lead the US treating Hong Kong the same way it treats mainland China. That would mean higher tariffs, including those enacted amid the trade war between the United States and mainland China in 2018.
However, the US only imported US$4.7 billion worth of goods from Hong Kong in 2019, limiting the impact of imposing tariffs on Hong Kong products.
On the flip side, with Hong Kong, US runs a trade surplus as seen from 2019 numbers. US exports approximately US$30.8billion worth of goods and services to Hong Kong, while US imports only US$4.7 billion from Hong Kong. This gives US a trade surplus of US$26.1 billion, as seen in the table above.
From 2009 to 2018, the US trade surplus with Hong Kong was the biggest amongst all its trading partners, this begets the question, does it matter to China if Hong Kong loses its special status?
Rather, Hong Kong which has a zero tariff rate on imports of US goods, would be at risk of Chinese retaliatory measures.
Dollar Peg Breaking
There have been fears that the US might break the 36-year-old dollar peg system that fixes the Hong Kong currency exchange rate at 7.8 Hong Kong dollars per US dollar.
This peg was established almost a decade before the US gave Hong Kong its special trading status. Furthermore, Bremridge (Hong Kong’s Financial Secretary) reported to have informed the US when the city first established the peg system, but did not need to seek approval.
Lastly, the Hong Kong Monetary Authority has a strong foreign reserve position of over US$440 billion, which is more than two times their monetary base. Hence, they would definitely be able to defend the peg at the current exchange rate.
The National Security Law would depend on its details and we have yet to see the details of this legislation. Does it still allow for the autonomy of Hong Kong and just restricting issues of foreign interference? If it is truly just restricting issues of foreign interference, then does US have a right or grounds to limit China imposing such a law?
With regards to Hong Kong, I quote what Kishore Mahbubani said and he couldn’t have said it more aptly.
“But Hong Kong is going to sadly become a political football in the new geopolitical contest that has broken out between the United States and China. The sad part about being a football is that the players enjoy kicking the ball. But the ball is the one that gets damaged and broken in the end. So that’s the danger that Hong Kong faces.“
Ultimately, as I said during the ShareInvestor Outlook for 2020 Event, there are different types of Hong Kong-listed companies. It is crucial to differentiate between the following:
- HK-listed Chinese companies that is focused on the domestic Chinese economy, deriving the bulk of its earnings/assets from mainland China
- HK-listed Hong Kong companies that is focused on the domestic Chinese economy, deriving the bulk of its earnings/assets from mainland China
- HK-listed Hong Kong companies that is focused on the Hong Kong domestic economy, deriving the bulk of its earnings/assets from Hong Kong