"This Is The End Of Hong Kong": China Congress Announces Crackdown On Hong Kong With New "National Security" Law; Abandons GDP Target

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by Tyler Durden
Friday, May 22, 2020 - 06:32 AM

With China's ambitions toward Hong Kong having emerged as the top political fault line in recent days, the market was closely following the start of Friday's National People's Congress (NPC) where in addition to disclosures on Chinese political strategy, Beijing announces decisions on targets on GDP, CPI and fiscal deficit.

Which is why many were surprised when in the text of Premier Li Keqiang's annual address, for the first time China abandoned its usual practice of setting a numerical target for economic growth this year due to the turmoil caused by the coronavirus pandemic. 

"I would like to point out that we have not set a specific target for economic growth this year," the report said, according to Bloomberg which saw a leaked version. "This is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the Covid-19 pandemic and the world economic and trade environment."

As Bloomberg adds, the shift away from a hard target for output growth not only breaks with decades of Communist Party planning habits, but is an admission of the deep rupture that the disease has caused in the world’s second-largest economy. With the growth outlook depending also on the efforts of trading partners to rein in the pandemic, the government is shifting its focus to employment and maintaining stability.

Among the various other economic goals disclosed by China, are:

  • The addition of 9 million urban jobs; surveyed jobless rate around 6% (as we reported recently, the People's Liberation Army is aggressively hiring all those who lost their jobs due to the pandemic, so at least China's army will soon be absolutely massive)
  • Plans 3.75 trillion Yuan of Special Local Govt Bonds in 2020 (a relatively modest number)
  • Sell 1t yuan of anti-virus sovereign bonds in 2020 (even more modest)
  • Deficit-to-GDP ratio this year is projected at more than 3.6% and the deficit increase is projected at 1 trillion yuan (about $141.6 billion) over last year (remember when China actually ran a budget deficit)
  • China to work with U.S. to implement phase 1 trade deal (a noble goal, also one which will never happen)
  • China sets 2020 CPI target at about 3.5% (China may have to launch another "pig ebola" virus to boost food inflation)
  • China to use innovative monetary policy tools to finance real economy (so China will do QE as well?)
  • China’s monetary stance unchanged; to make prudent monetary policy more flexible, appropriate
  • China to use RRR cuts and interest rate cuts, relending
  • China to guide money supply ‘significantly’ higher than 2019
  • China targets more stable, high-quality imports, exports
  • China to keep yuan at reasonable and equilibrium level
  • China targets basic equilibrium in balance of payments
  • China to cut taxes, fees by about 500b yuan this year
  • China to asks large banks to boost lending to small firms by 40% (the US doesn't hold a trademark on a debt bubble after all)
  • China sees defense spending up 6.6% to 1.268 trillion yuan (see "China’s Military Seeks Bigger Budget Amid "Growing Threat Of US Conflict"")

While none of the above was especially remarkable (with the exception of the hint at QE), the reason why stocks gave the report a thumbs down is because as Premier Li also said, China will safeguard national security in Hong Kong, i.e., China plans on expanding its crackdown on Hong Kong sovereignty, a step that comes one day after China announced dramatic plans to rein in dissent by writing a new law into the city’s charter, and just hours after the Senate passed a bill that will retaliate against China should it do precisely that, effectively ensuring an even further deterioration in US-Sino relations.

Specifically, the National People’s Congress confirmed plans to pass a bill establishing “an enforcement mechanism for ensuring national security” for Hong Kong, with Reuters adding that China's draft Hong Kong legislation says Hong Kong "should finish enacting as soon as possible the regulations in basic law regarding national security" and that Hong Kong government and legal bodies should effectively prevent, stop and punish activities that endanger national security.

Chinese lawmakers were preparing to soon pass measures that would curb secession, sedition, foreign interference and terrorism in the former British colony, local media including the South China Morning Post reported Thursday, citing unidentified people.

"We will establish sound legal systems and enforcement mechanisms for safeguarding national security in the two special administrative regions, and see that the governments of the two regions fulfill their constitutional responsibilities,” Li said according to prepared remarks on Friday.

As Bloomberg adds, any attempt to impose security laws now could reignite the unrest that hammered the city’s economy last year and serve as a flash point amid broader U.S.-China tensions. Protesters urged democracy advocates to hold rallies across the city Thursday night, with one poster describing the moment as a “battle of life and death,” but mass demonstrations didn’t immediately materialize.

"This is the end of Hong Kong," said Dennis Kwok, an opposition lawmaker representing the legal sector. "I foresee that the status of Hong Kong as an international city will be gone very soon."

More importantly, we now have a timeline: the law is expected to pass China’s parliament before the end of its annual session May 28, so retail investors have about a week to ramping stocks higher before the trapdoor opens.

The legislation would still require several procedural steps including approval by the NPC’s decision-making Standing Committee, which could come as early as next month, the SCMP said. The move comes before citywide elections in September in which opposition members hoped to gain an unprecedented majority of the Legislative Council.

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Although national security laws are required to be passed by Article 23 of the Basic Law, Hong Kong’s mini-constitution, successive governments have failed to pass them, with one effort in 2003 resulting in widespread street demonstrations. This new strategy could potentially allow authorities to skip the local legislative process, although the mechanics of how that would work remained unclear.

"It is absolutely necessary that the country’s top legislature fulfill its obligation to guarantee national security, by strengthening the legal framework with regard to Hong Kong," the state-run China Daily said in a commentary. "There is nothing untoward in this as all countries attach the utmost significance to national security, and the introduction of such a law will safeguard the long-term stability and prosperity of Hong Kong."

In addition to a more than 3% drop in Hong Kong stocks following the report of the imminent crackdown, three- and 12-month forwards on the Hong Kong dollar rose in New York trading, indicating traders expected more weakness ahead for the currency, which slipped the most in six weeks earlier in the day.

“The market is taking this news negatively for Hong Kong given the likely return of violent protest activities, higher risk for the U.S. to remove certain preferential terms for Hong Kong, such as the special tariff status, and risk-off sentiment,” said Becky Liu, head of China macro strategy at Standard Chartered Bank Ltd.

In addition to an imminent return of violent Hong Kong protests, China's position sets up an election-year showdown with Trump, who has come under pressure in Washington to reconsider the special trading status before the city’s return to Chinese rule under a promise to maintain its liberal financial and political structure. Secretary of State Michael Pompeo has delayed an annual report on whether the city still enjoys a “high degree of autonomy” from Beijing, telling reporters Wednesday that he was “closely watching what’s going on there.”

On Thursday, Trump warned that the U.S. would respond to any move to curtail protests and democratic movements in Hong Kong: "I don’t know what it is because nobody knows yet," Trump, speaking to reporters as he left the White House on Thursday, said about the possible Chinese actions. "If it happens, we’ll address that issue very strongly." He didn’t elaborate.

Assuring that this will only get worse, much worse, a late Thursday tweet from Global Times editor in chief Hu Xijing said that "Hong Kong belongs to China, not the US. If senior officials in Washington are confused about this, President Trump's granddaughter can tell them this common sense."

The climax came when late on Thursday, senators Chris Van Hollen (Democrat) and Pat Toomey (Republican) introduced legislation to punish Chinese entities involved in enforcing the proposed new security law in Hong Kong and penalize banks that do business with those entities. They acted in response to what they said was the Chinese Communist Party’s “brazen interference” in Hong Kong’s autonomy. Meanwhile, China has repeatedly stressed that the US should mind its own business and not mess in internal affairs, with Hong Kong considered one of them.

Perhaps this is a good time to reread the latest Dalio blog post on why a war between the US and China is now inevitable.