Hong Kong security law and the future

When you have holidays in two major money centres, nothing much happens in the rest of the world. Yesterday was a US federal holiday to commemorate all those who sacrificed their lives in the US military. In UK it was a spring bank holiday.

But matters were fairly active in HK and Beijing. There are big changes happening in the markets with China’s recent announcement of imposing new national security laws in HK. Pro-democracy activists, diplomats and business-people are stunned as to what course of action they could exercise to challenge China.

It was only a few months back that we were told that US-China relationships were great. The trade deal was all agreed upon and we can go back to business. In no time, for reasons you all know a lot of mistrust has developed not only between US and China but with many other major countries of the world. To compound to that, China dropped this bombshell news on Friday about HK.

Yesterday, they also weakened its official Yuan midpoint to the weakest point since the 2008 GFC. The PBOC set the midpoint at 7.1209 yuan per dollar before the market open, 270 pips, or 0.38% weaker than the previous fix at 7.0939. This is the weakest level since Feb 28, 2008. This should really irk President Trump and his China watchers.

What is more important is Hong Kong. Hong Kong’s standing as a major financial centre rests partly on its decades’ long currency peg. The USD/HKD peg has weathered many a storm and stood its test of time for 36 years. Since 2005, it has traded within a range of 7.75 to 7.85 meaning the HKMA always stepped in when the extremes were challenged giving businesses the comfort of holding a currency with known risks.

HK has massive reserves to the tune of US$ 450 billion. So, it is a minority of people who believe the peg could be broken. But the historical evidence supports the minority. Who ever thought that the UK will be pushed out of the ERM? In fact, it was one man who singlehandedly broke the BoE’s back - George Soros. Who ever thought that the UK will vote for a Brexit? Fortune favours the bold. There is one major hedge fund manager, Kyle Bass – founder and principal of Hayman Capital Management who believes it is only a matter of time when the peg will be attacked seriously.

It doesn’t take too long for a country to move from being Switzerland to Argentina. Forget not Venezuela.

There is an old Chinese saying “after the harvest, settle accounts” – which means to take revenge when the time is right. China seized this opportune time of the pandemic restrictions of people gathering to introduce these ‘draconian’ measures.

It all depends on how President Trump and other governments will respond to China.

But remember one thing: from the Chinese cultural context “you can lose everything but not your face”.