Hong Kong, which for 155 years (1842 –1997) was an overseas territory of the Kingdom of Great Britain and Northern Ireland, and for 23 years functioned as a special administrative region of the People’s Republic of China was at the turn of history. There is a growing advocate that the time of its real autonomy and guaranteed civil liberties is coming to an end. The resolution of the All-China Assembly of People’s Representatives (of 28 May) on the “security” of Hong Kong paved the way for this…

Under the catchy eye of Beijing…

Hong Kong’s economy is the result of a British talent for running (global) businesses combined with Asian diligence, while deeply rooting in an insular institutional bench. No wonder, then, that since the Index of Economic Freedom was created in 1995, Hong Kong either leads or takes second place with Singapore. Thus becoming a model realization of the concept of positive non-interventionism, the object of admiration of the most prominent representatives of the Chicago school, with Milton Friedman at the helm.

It is difficult to be different since hong kong’s gross domestic product increased 180 times between 1961 and 1997 and GDP per capita 87 times. Hong Kong’s structural strengths include a very robust and modern market-based financial system, literally balanced public finances (virtually no public debt), large foreign exchange reserves (about USD 408 billion in 2017) and a well-functioning legal system, with which they correspond to such advantages as one of the lowest levels of corruption in the world and far-reaching banking secrecy.

The value of GDP generated in 2019 with a nominal value of USD 372 989 billion, is Hong Kong as the 32nd economy of the world. It is therefore an economy with similar potential to Ireland, and at the same time larger than the economy, for example: Malaysia, South Africa, Denmark or Finland. On the other hand, in terms of purchasing power parity (PPP) of 64,600 USD, was applied in Hong Kong is close to the US, which means it is among the 10 wealthiest countries in the world. For example, Poland was in 44th place in this ranking, with a PPP of 31.3 thousand USD.

In sector-by-sector terms, the strength of the economy is determined by services, generating around 92% of GDP, followed by industry around 7,9 of GDP. and agriculture (0.1%). Such a significant dominance of the services sector (notabene typical of the UK economy) is primarily derived from the extensive sphere of market finance, the exemplification of which is the Stock Exchange of Hong Kong, asia’s third-largest stock market, behind Tokyo and Shanghai. The Hong Kong Stock Exchange is part of the Hong Kong Exchanges and Clearing Limited group, which has controlled the London Metal Exchange, the world’s most prestigious industrial metals market since 2012.

Another hard-to-overestimate economic gem of Hong Kong, resulting from its strategic for business (and beyond) geographical location is the huge port. World-leading in terms of handling and container shipments. From here, hong kong export goods come into the world, mainly: textiles, clothing, electronics, plastics, toys or watches.

When Hong Kong left the British empire in 1997, its share of China’s GDP weighed a lot, as it was around of GDP 18 %. Currently, this contribution hovers around 3 %, but the ‘qualitative’ aspects indicated above (i.e. institutional and geoeconomic) are not to be underestimated.

 

…life in Hong Kong is becoming less and less free

The attack on civil liberties and political autonomy, while seizing the above-mentioned economic wealth, has so far been fairly subtly implemented by Beijing. A year ago, however, an unbloogging wave of large socio-political protests in Hong Kong began. Until the pandemic period, it was an expression of accumulated anger first caused by Beijing’s personal interference in the autonomous government, and then a pro-China initiative to allow the extradition of Hong Kong citizens to China. When it seemed that the opposition had proved effective, despite the increasingly brutal attempts to pacify it, a new conflict erupted.

On Sunday, May 24, another wave of protests began on the streets of Hong Kong. They have been caused by issues for Hong Kong citizens – even more fundamental. This is about the implementation of the new national security regulations. As a result, they strike at the existing legal basis for the operation of the metropolitan autonomous area. According to sinologists, the essence of the provisions implemented is the changes in the regulations resulting from the wording of Article 10. Article 23 of the Hong Kong Basic Law of 4 April 1990. It was on these grounds, together with the 1984 British-Chinese agreement, that this institutional construct was coined: ‘one country – two systems’, to be in force until 2047.

Now Beijing’s intention is to ban all forms of civil opposition under the pretext of countering “separatism, terrorism, subversive activity and foreign interference in Hong Kong’s affairs”, to ban all forms of civil opposition and thus to be able to officially legalize the activities of Chinese security authorities in the territory of this Hong Kong. This is tantamount to the possibility of surveillance, detention and arrest of its inhabitants. The achievement of this objective therefore significantly brings the arrival of “one country and one system”.

 

Hong Kong as one of the fields for the new “Cold War”

Opening the world after COVID -19, or its current phase, coincided with an escalation of tension between the US and China, which should not come as a surprise to the Exeria Network community, and then as part of our analysis review on global markets, we discussed it more widely on the blog. Exeria.com. The tightening of the oppressive loop around Hong Kong is part of the overall confrontational rhetoric of the US- China. President Donald Trump directly blames the China for the cover-up and, consequently, for the spread of the global pandemic. Prior to the weekend, he announced the suspension of entry to the U.S. for Chinese citizens deemed a threat to U.S. research and that chinese companies whose shares are traded on the U.S. stock market are under special scrutiny.

The presidential initiatives against China are also to be punished by Beijing’s tightening of control over Hong Kong, according to the Wall Street Journal. However, Mr Trump’s speech was preceded by numerous speculations about possible sanctions. There was also no shortage of so-called “red lines”. the nuclear option, which would consist in directly striking Chinese interests in Hong Kong, by banning the use of the United States currency for settlements. So far, this has not happened, but in the event of a further escalation of the conflict and such an option will probably lie on the table. In my view, it is also possible to exert pressure in the form of threatening to pull a “plug” from one of the global billing systems such as Mastercard or Swift.

Such solutions may seem highly unlikely, but at least since the Cold War and the Nobel Prize-winning uprising – the basis of the conflict strategy by Thomas C. Schelling, we know that you don’t have to use the most dangerous weapon at all. It is sufficient for the opposing party to be well informed about its existence and its effects. In this case, the two parties strengthening in their conflict – they know that there is also a “Taiwanese issue” in the game.

Hong Kong is the best place for companies from mainland China to accumulate funds, as its agglomeration provides direct access to foreign investors. In addition, it is also important to note the relevance of the settlement in USD for companies listed on the Hong Kong Stock Exchange.

It is, after all, the main currency in capital integration processes with international companies, a lot of them by acquiring shares listed hong kong exchange invests in Chinese companies located in the continental part.

 

…and the area of lucrative financial investment

This situation implies increased interest from global financial investors. Their attention is almost primarily directed towards the foreign exchange quotation market (in particular usd/HKD and EUR/HKD) and towards the capital market. In the case of the Hong Kong dollar (HKD), which is the ninth most traded currency in the world, according to recent measurements by the Bank for International Settlements, it is worth remembering that it is largely “private” money. It is issued by three commercial banking institutions, namely HSBC, Standard Chartered and Bank of China, and the issue of 10 HKD banknotes and coins is already dealt with by the Hong Kong Government. The analysis of long-term exchange rate trends for the Hong Kong dollar reveals to us the rather specific behaviour of this currency, especially with regard to the underlying USD/HKD relationship.

This singularity is characterized not only by the volatility itself, but above all by a certain puzzling length of usually unusual vertical bar trends. This particularity is further accentuated by the very different observations raised from the observation of the us dollar to the Singapore dollar (US/SGD), a country largely similar to Hong Kong. In this case, however, we see a rather typical, i.e. a far-reaching compatibility – both with the market sentiment of the different periods and the issuance of signals from the macroeconomic environment.

Currency prices, i.e. its rates, reflect an external assessment of a country’s economy and outlook. In other words, it’s also one of the channels of communication with the world. It is therefore difficult to imagine that China would not be interested in the direction of the Exchange rate of the Hong Kong currency against the dollar (to the euro, moreover, also) the most important money in the world, and at the same time the currency of the country – the main antagonist. It is worth recalling that when, last year, and especially since the autumn in Hong Kong, waves of protests erupted, the Hong Kong dollar in relation to its American and European counterpart was peculiarly gaining in value, communicating as if in this way “progressive stabilization”….

In view of the above, the current situation in Hong Kong should be observed in two main options. If the demonstrations subside, then the chance that the USD/HKD will be more market-based than Beijing will decide for some time. Then the USD/HKD exchange rate can enter another “vertical” trend. Otherwise, the entry of the protests into a new even more firm form of opposition would rather expect a return to the behind-the-scenes appreciation for HKD of currency intervention. Of course, the form of the US response will also be important here. The possibility of a re-emergence in the media of the dollar ‘nuclear option’ should indeed increase the upward pressure on the euro against HKD.

 

Table 1. Return rates for USD/HKD and EUR/HKD for selected periods (in %, as at May 30, 2020)

Currency pair 1 month 3 months YTD 1 year 3 years
USD/HKD +0,01 +1,1 +2,8 –1,2 –0,5
EUR/HKD +2,1 –0,7 +4,8 –1,5 –0,9

source: own study based on stooq.com

 

Much more, but not entirely, about the real situation of Hong Kong and what little unfortunately promising prospects under pressure from China – tells us the main indicator of the stock exchange there: Hang Seng, which is both the subject of an ETF offer and, above all, an instrument offered on the Forex/CFD market.

Financial instruments directly related to Hong Kong and offered by the City Index in the Forex/CFD market are:

• USD/HKD
• EUR/HKD
• Hong Kong 50 CFD

The above instruments can be traded using the website and the trading platform: exeria.com

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