Hong Kong-China Tensions Rattle Investors Ahead of Holiday Weekend

The chasm in Chinese-American relations deepened on Beijing’s move to further curtail Hong Kong’s autonomy, and markets have taken notice.  

A man with a protective mask in the rain looks at an electronic stock board showing Japan’s Nikkei 225 index at a securities firm in Tokyo earlier this year. (AP Photo/Eugene Hoshiko)

MANHATTAN (CN) — Much like the curse “may you live in interesting times,” a turbulent week on Wall Street got more “interesting” as Sino-American tensions peaked after a move by Beijing threatened Hong Kong’s autonomy. 

On Friday, China announced a new national security law to ban secession and foreign interference in Hong Kong, threatening to end the “one country, two systems” policy that has been in place since 1997. That policy recognized Hong Kong as part of China but allowed the city to keep its own administrative systems and capitalist economy.

Beijing said the move was necessary due to the increasing “Free Hong Kong” protests that have rocked the city over the past year. 

With little in the way of other economic indicators the day before Memorial Day weekend, investors were especially attuned to the brewing tensions between the two countries.

Monday’s huge rally seems an eternity ago, as markets have since gradually sloughed off gains, though the week is still a net positive for investors. The Dow Jones Industrial Average capped off the week by closing just a few points lower than where it had opened Friday morning. The S&P 500 and Nasdaq each gained about half a percentage point on Friday.

Markets abroad suffered worse, with Hong Kong’s index plummeting 5.56%, its worst drop in about five years, and European markets close to flat.

“For now the markets remain wary rather than reactive, with only a muted response in priced action as traders watch the Sino-U.S. relations deteriorate,” Boris Schlossberg of BK Asset Management wrote in a morning investor’s note. 

“Given the dour economic backdrop and the very real possibility of violence in Hong Kong, the risks to the downside have increased markedly and markets will only be able to ignore them for so long before selling pressure begins to take hold,” he wrote. 

Investors and companies alike worry about a growing economic cold war between the countries, hoping it doesn’t develop into something further.

“Our members are very concerned about the prospects for a return to violence and tumult,” said Doug Barry, spokesman for the U.S.-China Business Council, a group of about 200 American companies that operate in China. “Should the U.S. revoke its special relationship with Hong Kong and there’s further chaos in the streets, the fortunes of the city would take a very bad turn.”

American lawmakers railed against China. The U.S. Commerce Department announced Friday afternoon it was adding two dozen foreign companies to its “Entity List,” which prohibits them from exporting or transferring certain items. Those companies “represent a significant risk of supporting procurement of items for military end-use in China,” the department said in a statement. 

U.S. lawmakers already had elected to put pressure on China, passing legislation on Wednesday that would require companies to certify they are not owned or controlled by a foreign company and banning companies from listing on U.S. markets if federal regulators are unable to inspect the company’s audits for three consecutive years. 

China has refused to let the Public Company Accounting Oversight Board, a U.S. accounting regulator, inspect Chinese-based public companies’ books.

“It’s asinine that we’re giving Chinese companies the opportunity to exploit hardworking Americans — people who put their retirement and college savings in our exchanges — because we don’t insist on examining their books,” said Senator John Kennedy, R-La., who co-sponsored the bill. “There are plenty of markets all over the world open to cheaters, but America can’t afford to be one of them.”

According to Politico/Morning Consult poll on Wednesday, China has become Public Enemy No. 1 in the United States, with many believing the country either foisted the coronavirus on the world or else suppressed information on how it spread so quickly to avoid embarrassment. 

In a Politco/Morning Consult poll on Wednesday, more people see China as “an enemy” than they did in January. But more of the poll’s respondents trust Joe Biden over President Trump to handle foreign policy, with 43% preferring the Democratic candidate to Trump’s 38%. 

Lockdowns and economic malaise due to the pandemic have also threatened phase one of the U.S.-China trade deal, in which China agreed to buy an additional $200 billion of U.S. imports in exchange for lower tariffs.

Most experts believe China will not be able to meet its dollar-amount targets within the two-year timeframe due to the pandemic. “What’s important is the intent,” said Barry, noting that the agreement is a “net positive” and will ultimately lead to 1 million U.S. jobs. “Walking away from the agreement would be a disaster.”

During the annual session of China’s parliament Friday, the Premier Li Keqiang said China would work to meet its end of the deal. “We will work with the United States to implement the phase one China-U.S. economic and trade agreement,” Li said. “China will continue to boost economic and trade cooperation with other countries to deliver mutual benefits.”

China’s economy has fared just as badly as the United States has during the pandemic. During the parliament, China announced for the first time it had no specific target for gross domestic product in 2020 because of uncertainty over Covid-19. China has published its GDP goals since 1990. This is the first time the country has backed off releasing GDP targets.

Many expect China to have a protracted recovery. Unemployment is officially at 6% and real estate prices haven’t yet recovered from late 2019, Scott Kennedy, a senior adviser on China for the Center for Strategic & International Studies, said during a Thursday webcast. “China’s economy is recovering, but very slowly. There’s going to be no V-shaped recovery,” he said.

More than 5.1 million people worldwide have been confirmed infected by Covid-19, according to data from researchers at Johns Hopkins University, and roughly 333,000 have died. In the United States, more than 1.5 million people have contracted the novel coronavirus and nearly 95,000 have died.

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