Some thoughts on Hong Kong

Massive demonstrations in Hong Kong have set inhabitants of the Chinese-controlled territory (handover on July 1, 1997) against the Chinese government, with 1.7 million people involved in demonstrations on August 18, equating to 25% of the population.

The key issue at stake here is the shift in the political landscape in Hong Kong after the region’s government announced plans to amend its extradition law, as Hong Kong inhabitants fear Chinese control over the HK legal system, giving rise to concerns that they could lose their independence from Beijing. This means the risk that Hong Kong could lose some of its special status (one country, two systems since the agreement implemented in 1997), jeopardizing the personal safety of all HK inhabitants.

Hong Kong Chief Executive Carrie Lam stated on July 8 that the extradition bill was dead, but this did not appease demonstrators, who are calling for her resignation: not only was she was the instigator of the proposed amendment, but she is also not democratically elected – rather she is appointed by a 1,200-member election committee, mostly appointed by Beijing. The Chief Executive should be appointed via elections based on universal suffrage, but since the umbrella revolution in 2014, Beijing’s approach to HK has changed and the Chinese government no longer seems to want to comply with the initial democracy agreements. 
This public backlash against political changes in HK is also due to the fact that the Chinese government meddles in legislative elections, stepping in to rule against one candidate or another. 
China has taken a firm stand to quash this social unrest, and troops are barracked at the border with Hong Kong, involved in maneuvers although not intervening. 

It is interesting to look back in time to understand what is happening and gain some insight into the Chinese government’s heavy-handed reaction. 
During the UK handover of Hong Kong to China in 1997, it was agreed that there would be one country, two systems i.e. Hong Kong would remain subject to market forces and China would maintain a socialist system. China would be in charge of HK’s defense and foreign affairs, but the region would have its own constitution with a strong degree of autonomy from China, maintaining freedom of the press, freedom of assembly and the right to demonstrate, etc.
The agreement that came into force on July 1, 1997 was signed for a duration of 50 years – i.e. until 2047 – after which the one country, two systems set-up could become one country, one system.

But this is the very issue that is attracting concern in Hong Kong: the initial idea was that the two systems would converge, based on the assumption that China would develop economically and its political system would evolve towards the HK system, not vice versa. This was the idea put forward by Samuel Pisar i.e. greater economic affluence would lead to the gradual implementation of a more liberal and democratic political system.
However, judging by moves from Beijing, residents of Hong Kong look on as their system shifts and moves towards the Chinese political system. They are concerned that they will gradually be incorporated into this system and become just another Chinese province among others, which would mean access to information being more restricted and freedom of speech becoming much more limited than it is now: Hong Kong has a lot to lose.

The government in Beijing does not want to take the risk of allowing social unrest to gain a foothold, and has not shied away from repressing any demonstrations that take place across the country. To avoid this type of situation, the Chinese authorities take a very active approach to applying economic policy, and are strict in ensuring that social instability does not take root. This is one of the factors underpinning the widespread development of electronic surveillance in China, as facial recognition and the social credit system are ways of curbing these risks in a type of digital dictatorship engineered to avoid social strife.
This need for the authorities to curb unrest is exacerbated by the fact that growth is slowing and the Chinese economy is struggling to create all the necessary jobs.

In other words, the authorities in Beijing do not want the Hong Kong demonstrations to spread to the rest of China, which is fettered by more sluggish growth. This is a dangerous situation, as citizens in both Shenzhen and Guangzhou are closely watching how the Hong Kong-Beijing relationship pans out: a number of Shenzhen residents work in Hong Kong, so there is no longer a strict separation between the territory and the rest of China.

This battle of wills raises a number of questions.
Chinese military intervention in Hong Kong is one of the list of potential options, but this kind of political move could well draw parallels with the Tienanmen Square events in the spring of 1989.
This would be damaging for China as its international expansion has been exponential since 1989 and moves aimed at extending the country’s influence – such as the Belt and Road Initiative – would be threatened by military intervention. This would also be a major risk as that the country is involved in a stand-off with the US and is able to offer technological capabilities that could help skew the world balance in China’s favor: in this respect, the Huawei affair is symbolic as the company has the wherewithal to replace mobile telephone networks and swiftly migrate all European countries to Chinese 5G technology.
So this kind of move would trigger hefty risks at a time when China wants to challenge the US both economically and politically.
Meanwhile, a deterioration in Hong Kong’s status resulting from Chinese intervention and putting it on a par with other Chinese regions would increase mistrust of Beijing from all other world capitals. 

However, this mistrust may only last a short while, and China can hope that its economic and technological firepower would ensure that it emerges as leader over the years ahead, with intervention having a limited effect over time. After all, the events of Tienanmen Square did not stop China growing and extending its influence in the world over the past 30 years.

Ultimately, the issue at stake here is China’s role in the world, as the country stands against the US in a worldwide economic and political battle of wills. Technological, economic and political leadership is being played for, and Washington has not managed to put an end to its contest with Beijing after Chinese retaliation forced Donald Trump to back down last week when he delayed border tariffs on electronic consumer goods to December 15.
China is also currently finding its domestic balance, and keeping Hong Kong’s current status would mean maintaining access to the rest of the world and allowing the rest of the world to have access to China. This communication is vital, although HK admittedly only accounts for 3% of China’s GDP as compared with 20% in 1997. 
China could well be on the way to becoming the economic heavyweight it was before the industrial revolution in Europe. The choices it makes in addressing the demonstrations in Hong Kong will be a harbinger of just how it plans to act in this leadership role in today’s globalized world. 

What to expect next week ? (August 19 – August 25, 2019)

Highlights

> Discussions on trade war between China and the US have been the main trigger for financial markets last week. It will continue as China is ready for retaliation. That’s the way we must interpret the recent change in the White House measures. It has postponed new tariffs to December the 15th. It was said to ease Xmas gifts but it was more probably the consequences of the discussions between the two countries. After December the 15th, 96.8% of Chinese exports to the US will have tariffs. That’s a terrible change compared to the 5.3% seen in 2013.
The situation between the two countries and the Chinese announcement of retaliation are a source of concern and of lower interest rates. The risk is to jump into a global recession.
With the deep slide seen on interest rate this week (August 12) after the discussion on trade, the main question is to anticipate until which level they will be able to go in negative territory in the Eurozone.

> The impact of this trade war is already seen in exports figures for Japan. In real terms, the exports are already down more than 2% in YoY comparison. The figure for July (August 19) will probably confirm this trend implying new risks for the Japanese growth.

> The Markit indices for August will be released as flash estimates for Japan, Euro Area, Germany, France and the US on August the 22nd. We will look carefully at the manufacturing sector where the world index (will not be released next Thursday) is already in the contraction zone and where all indices for larges developed countries are close or below the 50 threshold.

> In the UK, the CBI survey on new orders may confirm the risk of a deep recession (August 20). The recent drop of this index is already impressive as accumulated inventories for the Brexit limit the possibility of a supplementary demand.

> The last point to look at will be the US housing market. The Existing Home Sales figure will be released on August the 21st. This is an important data as it supports a wealth effect for US households. Recent figures do not show an improvement even with lower mortgage rates. New Homes Sales will be released on August the 23rd.
> August 19 Final CPI release for July in the Euro Area. August 21, the German consumer confidence for August and CPI for Japan on August the 23rd.

The document is here
NextWeek-August19-August-25-2019

What to expect next week ? (August 12 – August 18, 2019)

Highlights

=> The recent volatility on financial markets, through lower interest rates, was the consequence of lower expectations on global growth after the White House announcements. In the coming week, there will be data on retail sales in the US (15), China (14) and UK (15). These data will show the robustness of the domestic demand. If these data are strong in the US and in China, financial arbitrage may be modified in favor of risky assets

=> GDP growth in Germany will be, in the Euro Area, the most important indicator of the week (14). The industrial production index dropped dramatically in the second quarter (-7.5% at annual rate) and this downturn is consistent with a negative growth figure (probably more than the consensus at -0.1%).
The ZEW survey for August (13) will highlight the duration of this drop —Employment figures in the Euro Area and the detail for GDP will be released on August the 14th.

=> Employment figures will be important as the unemployment rate is low now (7.5% in June) and the economic dynamics is lower.

 

 

NextWeek-August12-August18_2019

What to expect next week ? (July 15 – July 21, 2019)

Highlights


> The Chinese GDP growth number for the second quarter (July 15). During the first three months of the year growth was at 6.4% It should be lower as monthly date on industrial production and imports show a poor momentum.
> Retail sales and Industrial production in the US (July 16). They will show the strength of the US economy. These will be important benchmark that may influence the Fed’s strategy. Powell just mentioned this week that there was no improvement despite the strong labor market report.
Associated to these numbers, the Fed’s beige book (July 17) will highlight the Fed’s perception of the economy at a regional level.
> The NY Fed (July 15) and the Phylli Fed (July 18) indices on economic activity will also provide data on the business cycle strength.

> ZEW index in Germany (July 16). A weak number following weak numbers in recent months may force the government to adopt a more proactive economic policy.
> Employment numbers in the UK (July 16) and CPI in the UK (July 17)
Weaker numbers on employment are still to come and will be seen after this summer with the strong slowdown expected in the manufacturing sector.

The document is available here NextWeek-July15-July21-2019

On the GAFA tax and the hostile reaction of the Americans

The reaction of other European countries in this new context of US reaction will be interesting. The new global and multi-polar equilibrium, that is emerging, forces Europeans to be more autonomous. It has already been observed that on the issue of 5G some European countries were not indifferent to Chinese offers, thus taking a distance from the Americans.
Europe must find and define its place in this new multi-polar balance. The GAFA tax and the American reaction can make it possible to define a dynamic specific to Europe with a distance from China and the US. The stakes are high for Europe to exist on a political scale.

Macro 5 Pager – Macroeconomic Momentum – 8 July 2019

> The world economy’s slightly chaotic showings reflect the likely end to a world balance dominated by the US, as well as the hunt for a new world order. This multi-faceted balance would include the US, China and Europe.
> This quest for a new equilibrium can be witnessed first and foremost in the current less coordinated and cooperative context, where each country seeks to get the most out of a situation where the rules are changing. Border tariffs are just one example of this.
> In the short term, this leads to uncertainty that drags down economic activity, as well as investment. Growth is slightly more sluggish across the board, while inflation remains contained and is still a far cry from the central bank’s target, especially in the euro area.

> There is a tendency towards continued accommodative monetary policy. Going too fast when all the risks for the economy have not fully emerged means taking the risk of having an insufficient impact and running out of options when the situation becomes more tricky.
> This would be the case for the US, where interest rate cuts being made too quickly would mean a fresh surge in liquidity, promoting more real estate lending and corporate credit from non-banking institutions, so excesses already seen would become even more severe. This would also heighten risks on these markets and curb the Fed’s ability to act in the event of a future crisis.
> Another key point is that long-term rates are set to remain very low for a very long time, until such times as this new world balance emerges: this will force the financial sector to reinvent itself.

The document is available here Macro 5 Pager – Macroeconomic Momentum – 8 July 2019

What to expect next week ? (July 8 – July 14, 2019)

Highlights

  • External trade for Germany is the statistics I will focus on this week (July 8). Since the beginning of the year, real exports are slowing down as a consequence of the trade war. Expectations are negative and this is a source of concern for the German growth momentum. The German government may have, in coming weeks, an opportunity to boost domestic demand to cushion this disruption.
  • The Chinese external trade will also be a major indicator (July 12) as a measure of the trade war impact.
  • The German industrial production index will also show a slowdown in May (July 8). This would be consistent with expectations on its external trade and with corporate surveys that reflect pessimism.
    The other point to mention here is that the UK industrial production will show a downward trend (July 11). This would be consistent with the Markit index for the manufacturing sector. In May the Markit synthetic index was at 49.4 (from 53.1 in April).
  • The US inflation rate for June (July 11) will slow as seen in European inflation rates for June (flash estimates) while the Chinese will remain strong (2.7% in May) as food price (pork price precisely) will continue to push up the price index.
  • Financial Stability Report by the Bank of England (July 11 at 1130 CET), Minutes of the last FOMC meeting (June 18-19) on July 10 (2000 CET)  and Minutes of the last ECB meeting (June 5-6) on monetary policy (July 11 at 1330 CET)

The document is available here NextWeek-July8-July14-2019