How Will Hong Kong Issues Affect Trade War?

If the trade war and a slowing economy weren’t enough for Chinese officials to deal with, the protests in Hong Kong seem to be growing in size and in intensity. How China deals with Hong Kong could be another issue brought in to the trade dispute between the U.S. and China.

The protests in Hong Kong have been going on for several months now and Chinese officials have even accused the U.S. of playing a role in them. The protest originally started over an extradition bill that was introduced in February. The bill would allow suspects to be sent to mainland China for trial. Of course, the Chinese courts are controlled by the Communist party.

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President Trump appeared to shift his policy regarding the protests within the last few weeks. Earlier in August the president called the protests “riots” and stated that it was a matter between Hong Kong and China. On Wednesday (August 14), President Trump tweeted, “Of course China wants to make a deal. Let them work humanely with Hong Kong first!” He went on to write, “I have ZERO doubt that if President Xi (Jinping) wants to quickly and humanely solve the Hong Kong problem, he can do it. Personal meeting?”

This seems like an attempt to tie a human rights issue in with the trade issue, and that isn’t likely to go over very well with China.

What was really odd was the timing of the tweets from President Trump. The U.S. stock market had just closed with the worst loss of the year on Wednesday with the Dow falling 800 points. The Dow had rallied over 300 points on Tuesday when the president announced the suspension of some tariffs through December so as not to affect the holiday shopping season.

While it might not be a good idea to tie the Hong Kong matters with the trade talks, there is definitely cause for concern in the global financial markets as to what happens in Hong Kong. The Hong Kong stock exchange is the fifth largest in the world and the city is considered a financial center.

Many Chinese companies get listed in Hong Kong before being listed in Europe or the U.S. The city and its financial industry seem to work like a gateway between China and the West. If China clamps down on the current two-system model or were to take over Hong Kong completely, it would wreak havoc on the global financial markets.

Another concern coming out of this ordeal is the impact on the currency markets. The Hong Kong dollar is pegged to the U.S. dollar and in the last few months the dollar has been strengthening and that means Hong Kong has to tap into its reserves to maintain the peg. It also hasn’t helped that interest rates in Hong Kong have been falling. With Hong Kong serving as a gateway between China and the West, we could see a further weakening of the Yuan. We got a glimpse of what happens when the Yuan falls sharply back between July 31 and August 5. Global stock markets plummeted until the People’s Bank of China came in and adjusted its exchange rate target.

Yet another thing to consider is that Hong Kong has a preferential trading partner status with the U.S.—at least for now. If China were to take over Hong Kong completely or if President Trump isn’t pleased with how China handles the situation, the president could rescind the preferential status.

Right now it seems like there are way too many factors being thrown in with the trade talks. Both sides are trying to get the upper hand in any way possible, but the one thing they don’t seem to be doing is talking directly with one another. Both sides are issuing statements in public forums and they aren’t meeting and talking. Of course, even if they do meet again, both sides will need to compromise to some degree if a deal is going to get done.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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