Renewed US-China Tensions

Sino-US tensions have rapidly escalated over the past couple weeks as U.S lawmakers are urging President Trump to impose sanctions or other measures on China for their burgeoning grip on Hong Kong. China announced its plans to impose a national security legislation on Hong Kong to combat secession, subversion, terrorism, and foreign interference in the city. The new security law on Hong Kong places China in direct violation of its international commitments whereby countries such as United States, United Kingdom, Canada, and Australia condemn China’s actions.

The four countries released a joint statement that “China's decision to impose the new national security law on Hong Kong lies in direct conflict with its international obligations under the principles of the legally binding, UN-registered Sino-British Joint Declaration”. Critics have stated that the proposed Chinese law would undermine the “one country, two systems” framework and consequently uproot the city’s autonomy.

Official statements

On Thursday 28/05/2020, China’s parliament approved plans to impose the security law with an overwhelming majority. The National People’s Congress voted 2,878 to 1 in favour of the decision to draft the legislation which is expected to be passed before September. To add further tensions, the U.S. administration revoked Hong Kong’s special status which means they will be stripped of trading and economic privileges.

Mike Pompeo, the U.S. Secretary of State, stated that the decision to withdraw Hong Kong’s special status arises from China not being able to honour its handover agreement with Britain and subsequently destroyed the city’s high level of autonomy. The actions from United States implies that “Hong Kong just becomes another Chinese city” according to pro-democracy lawmaker Claudia Mo and that it could lose trading privileges such as lower tariffs than China.

Implication for Markets

Shares on Wall Street closed lower on Thursday as Trump announced that he will host a news conference on Friday to address the growing concerns with China. The Dow fell 148 points which saw a 300-point swing in the last hour of trading.

The Hang Seng index declined 0.7% on Thursday as U.S trade with Hong Kong becomes a growing concern if tariffs are imposed. According to the Office of the U.S. Trade Representative (USTR), the U.S traded more than $66 billion in goods and services with Hong Kong in 2018 with exports to Hong Kong comprising of 75% of the total and imports accounting for the remainder 25%.

Furthermore, the Phase 1 trade deal that was signed in January that promised $50 billion in US energy purchases until end of 2021 has also come under scrutiny as analysts predict the rising tensions between U.S. and China will have wide ranging implications on the demand for energy, metals and agricultural goods. Oil prices, which were already under significant stress from the coronavirus, may be subject to additional risk as annual growth for crude, LNG and renewables may potentially have a weaker outlook if tensions persist between China and U.S.