Submitted by Michael Every of Rabobank
Yesterday the Global Daily noted that markets were under a Sword of Damocles in terms of the rapid deterioration in US-China relations. Markets were, of course, happier to focus on what might be a virus vaccine, despite the fact that the actual impact of the virus does not bother them, and on more upbeat US data, which runs against the trend in the virus that they aren’t bothered about.
Around 12 hours after publication came news that the White House plans to proceed with “harsh” Magnitsky sanctions against members of the Chinese Communist Party it sees as responsible for human rights abuses in Xinjiang. That decision may have been prompted by the US seizure yesterday of a cargo of 11.8 tonnes of human hair for wig-making which it alleges may have been sourced from “re-education” centres in Xinjiang holding ethnic Muslim populations: the US does not seem to believe Uighurs are all being taught hair-dressing. Beijing has already made clear it will be furious if this occurs: could it perhaps go so far as to target US firms in response?
Yet within hours that threat was eclipsed by the unanimous passage by the US House of Representatives of the bill already passed in the Senate to impose mandatory Magnitsky sanctions on Chinese banks who do business with officials implementing Hong Kong’s new national security law. Constitutionally, the Senate now needs to pass the bill again, which it appears will take no time at all given the sentiment in DC, and it then goes to President Trump with a veto-proof majority behind it - meaning it WILL become law. Perhaps even as soon as this this week, but certainly in the not-too-distant future. Underlining the present political dynamic, each member of Congress has, in all likelihood, broken said Hong Kong law by their actions and could technically be open to arrest if they were to visit.
The language of the bill, which is now crucial, states: “If the Secretary of State determines that a foreign person is materially contributing to, has materially contributed to, or attempts to materially contribute to the failure of the Government of China to meet its obligations under the Joint Declaration of the Basic Law” then the US is to impose sanctions on it. That is broad enough to cover anyone in the Chinese or Hong Kong government, security services, and/or civil servants. The bill also states any foreign financial institution that conduct “significant transactions” with anyone in the Hong Kong government or the National People’s Congress (NPC), or in the Hong Kong China Liaison Office, will likewise be cut off from the US financial system.
How are these individuals banked now? By Chinese banks. Will the NPC or Hong Kong government really be paid in cash from now on? Hardly. In which case, the Chinese banks that bank them would, under this bill, be cut off from USD in exactly the same way Iran has been. It is there in black and white. There might well be a lead time of a year to allow global positions to be unwound – but that would be the final destination.
Those thinking that in five months Joe Biden will act differently might also want to note that Nancy Pelosi pushed the bill too, and that yesterday he stated: “Beijing’s new national security law --enacted in secret and sweeping in scope-- is already dealing a death blow to the freedoms and autonomy that set Hong Kong apart from the rest of China”; that he would “prohibit US companies from abetting repression and supporting the Chinese Communist Party’s surveillance state”; and would “impose swift economic sanctions” if China dared to use the law on US citizens or firms.
The thread holding the Sword of Damocles is fraying faster than any virus vaccine is likely to arrive, and will continue to do so whether we get one or not.
Meanwhile Australia added its name to the list of countries saying they will take Hong Kongers wishing to leave; that after the UK confirmed it will indeed open a path to citizenship for up to 2.9m people. This should matter to markets too, even in their amoral liquidity-addled glory. While there is unlikely to be a sudden flood of exits (it’s hard to say goodbye to home; it’s very hard to travel right now; and it’s extremely hard to find a new job) one only needs to calculate what 500,000 people leaving, each taking USD1m in cash with them --which is a VERY cheap house in Hong Kong-- would do to Hong Kong’s USD reserves. Wipe them out entirely. Word on the street is that the HKMA would turn to the PBOC in this case. And who would the PBOC turn to if US sanctions are in place?
“Naturally”, Hong Kong stocks were up 1.5% at time of writing. That is despite daggers drawn, sword threads snapping, and a US-China melee breaking out.
Meanwhile, overnight we saw the Fed minutes underline that the FOMC is, for now, not keen on adopting yield curve control, and is certainly very opposed to negative rates. As our Fed watcher Philip Marey argues, in wanting to avoid the latter, the only logical alternative is the former. And the sooner US-China tensions erupt, the sooner we might be likely to find out how what that will look like in practice.
Quite the melee will ensure, I assure you.