While Hong Kong’s status as a key regional hub is unlikely to be fundamentally undermined, the secondary effects of the stand-off on trade and investment between the US and China may prove to be more material, writes Valdai Club Programme Director Yaroslav Lissovolik.
Throughout the past several weeks the stand-off between China and the US has intensified on several fronts, with frictions around trade and health security issues complemented by tensions around the status of Hong Kong. In particular, in response to China’s security law on Hong Kong, the US declared that it was withdrawing the preferential economic treatment for Hong Kong and that it would impose sanctions on China’s officials. This escalation in tensions between the two economic heavyweights exacerbates the risks for the global outlook as the world economy struggles to surmount the impact of the unprecedented economic downturn.
According to US President Trump, with the latest round of US measures "Hong Kong will now be treated the same as mainland China -- no special privileges, no special economic treatment and no export of sensitive technologies". The US President further added that Hong Kong “will no longer be able to compete with free markets. A lot of people will be leaving Hong Kong”. Among the range of measures undertaken by the US was also the signing into law of the Hong Kong Autonomy act, which apart from imposing sanctions on Chinese officials also targets banks that undertake significant transactions with them. According to Trump, "this law gives my administration powerful new tools to hold responsible the individuals and the entities involved in extinguishing Hong Kong's freedom".
The main effect of the latest round of US measures against China is that that it renders the sanctions regime not only more stringent, but also more entrenched. In particular, in line with the statement from The White House the Hong Kong Autonomy Act is likely to restrict the scope for the US President to waive sanctions. These measures also expand the coverage of economic restrictions to include the financial sector, which in turn represents a key part of Hong Kong’s economic prowess.
Nonetheless, the implications for Hong Kong as a regional hub are unlikely to be fundamental as some of its key advantages such as tax preferences as well as geography remain intact. Hong Kong will also likely receive further economic stimulus and backing from Mainland China as Beijing will likely aim to deliver a “demonstration effect” of the resilience of China’s economy to economic pressure. The bigger question will be the effect on investment and trade flows between China and the US as the Hong Kong issue is likely to accentuate the already significant divisions in the trade and security spheres.
In this respect, Hong Kong is an important part not only of the regional, but also the world economy. It serves as a key global logistical hub, an important financial center and a key gateway for the Chinese economy into global markets. According to the data provided by HKTDC Research Hong Kong in 2019 was the 8th largest exporter of merchandise trade in the world, featuring also as the third largest trade partner for China’s Mainland in 2019 accounting for 6.3% of the total. In the investment sphere Hong Kong is the main source of foreign direct investment into mainland China. In the financial sector, Hong Kong in 2019 was second in terms of the size of the foreign exchange market in Asia and 4th in the world. In terms of market cap the Hong Kong stock market is third largest in Asia. In the sphere of logistics, Hong Kong is the busiest airport for cross-country air cargo, while also featuring in the top-10 of the world’s ports in terms of container throughput.
The significance of Hong Kong for China is not only limited to the economy or even the ongoing political tensions on trade – it is also a geopolitical issue as concessions on Hong Kong may be also viewed by China as a retreat on a broader set of issues, ranging from the South China Sea disputes to the pressures it is experiencing from the US on the technological front and in the wake of the coronavirus pandemic.
What the Hong Kong case means then in the near term is likely a greater persistence in the tensions between China and the US. Hong Kong being supported by Mainland China will continue to be a key international financial and logistical center, with its regional role in Asia likely prioritized as it adjusts to the widening bipolar divide across the Pacific. With Europe being the center-stage of international tensions in the past, Asia is starting to take on some of the less “pacific” features with the global economy moving inexorably from the trading preferences to exchanges in sanctions and economic restrictions. Sadly so, given the gruesome international context that is screaming for greater international cooperation.