This week, the usual themes continued to dominate the headlines: Coronavirus, Brexit, economic recovery, Europe’s ‘Hamilton moment’, US-China trade tensions and so-forth.
Of these, the increasing US-China tension has pre-occupied our thoughts. The question is whether or not rising tensions will negate the potential positive effect on markets of any forthcoming bounce in industrial production.
So what happened? On Thursday, China’s National People’s Congress confirmed plans to pass a bill establishing an enforcement mechanism for ensuring national security for Hong Kong. No further details were forthcoming on Thursday according to Bloomberg but, according to press reports, Beijing is effectively moving to bypass the city’s legislature to implement national security laws. Residents fear the move will erode freedoms of speech, assembly and the press. In response, the Hang Seng Index plunged 5.6%, with real-estate firms the worst hit.
Democracy advocates called for protests against the legislation and President Trump said he would respond “very strongly”. Why does the US have any say? Well each year the US Secretary of State, now Mike Pompeo, has to declare whether Hong Kong still enjoys a high degree of autonomy from Beijing in order to assess the city’s special trading privileges with the US.
We do not think it is a coincidence that China announced this new Hong Kong law one day before it dropped its growth target. Keeping a growth target in place would have been a signal of weakness to Trump. The Chinese leadership has dared Trump to take action knowing that any real action taken by Trump would be bad for China but also bad for US and global stocks in an election year when Trump does not want a weak stock market.
The US should be less worried about China given that the size of America’s working-age population is set to more than double in size relative to China’s over the next 80 years but this is not Trump’s view. The US under Trump is badly placed to wage a new cold war against China. Borrowing from James Ganesh, the last cold war was won by the US with cultural attraction,