Heisenberg Report

Beginning Of ‘The End’ For Hong Kong Sparks Massive Rout In Preview Of Coming Showdown

Hong Kong shares collapsed on Friday, as expected, after China confirmed it will move to enshrine mainland national security protocol into Hong Kong law.

The move is being billed as “the end of Hong Kong”, and equities recoiled. The Hang Seng plunged more than 5%.

It was the biggest daily drop since July 2015, when the mainland equity bubble popped. The one-day spike in volatility very nearly matched the worst days of the March coronavirus panic in global stocks.

Make no mistake, this is a potential game-changer. Hong Kong would be obliged to implement laws against treason, secession, sedition and subversion, and the new law will also target “terrorism” and foreign meddling in the city’s affairs.

The pro-democracy demonstrations would surely fall under the new laws, and efforts on the part of, for example, US lawmakers, to support those protests would count as foreign interference. Carrie Lam will be required to put the new laws into effect “as soon as possible”. New enforcement entities are set to be established. Lam will be obligated to provide Beijing with regular reporting on the administration of national security “education”.

Xinhua on Friday called the protests an “increasingly notable national security risk” and “a prominent problem”. “Law-based and forceful measures must be taken to prevent, stop and punish such activities”, the state-run press agency said.

As noted here on Thursday, Beijing is effectively bypassing procedural legislative hurdles to get this done. In short, there does not appear to be anything anyone can do about it, other than slap China with more sanctions or, if you’re a pro-democracy demonstrator, take to the streets, only now at the risk of contracting a deadly virus.

The city’s property shares fell off a cliff on Friday, plunging more than 8%.

This is a veritable death knell for the city. The US may well be forced to revoke its special status, which would, in turn, effectively strip Hong Kong of its coveted role as a global financial hub. Such a move on the part of US lawmakers would not come overnight – it would be a fairly lengthy process, but that’s almost beside the point.

Last year’s protests dealt an existential blow to the city’s economy and although Hong Kong was mercifully spared the worst of the COVID-19 outbreak, the virus nevertheless cast further doubt on the viability of local retailers and the future of the city’s tourism industry.

Data out earlier this month showed the economy contracted a record 8.9% YoY in the first quarter. It was a disastrous print, and suggested the situation is worse than the GFC and the Asian financial crisis for the city.

It was also the third consecutive quarterly contraction, reflecting the extent to which Hong Kong came into the pandemic reeling from the trade war and months of social unrest.

Beijing’s aggressive chess move will force Donald Trump to support commensurately aggressive counteraction. Lawmakers on both sides of the aisle in Washington are squarely against this kind of power grab by Xi and you can expect legislation to be on the US president’s desk in relatively short order. Trump will then be forced to back up America’s proclamations about the necessity of standing up for democracy globally, at the possible risk of deep-sixing the trade deal in an election year.

No doubt it has occurred to Xi that this move boxes Trump in. Last year, he reluctantly backed Congress on Hong Kong, but repeatedly expressed some sympathy for Xi’s position. Now, there will be no room for ambiguity. Trump will have to choose a side.

Protests are guaranteed to flare anew in the city, and that will almost surely mean the economy is done for. Worse, any move by Congress to revoke privileges will obviously do more harm to Hong Kong business owners than it will to anyone in Beijing. In other words, in attempting to support Hong Kong, congressional action may simply accelerate the city’s economic collapse. China, of course, will not countenance that, and will instead effectively subsume the city, likely blaming foreign actions for its economic demise.

In short, Hong Kong’s fate is now sealed. Or at least that’s certainly how it feels to an outside observer.

Activists are ready to protest again, but that will be difficult. Not because anyone fears reprisals, but rather because social distancing protocols are still in place. Those protocols restrict gatherings to just eight people, which is a tad short of what protesters were able to muster for last year’s massive demonstrations.

It’s not difficult to conjure a nightmare scenario where activists decide to simply ignore the social distancing laws, on the way to inadvertently triggering a super-spreader COVID event in the course of tempting Beijing to unleash a violent crackdown on dissent.

Antony Dapiran, a city-based lawyer and author, summed things up in remarks to Bloomberg. “If Hong Kong is not able to serve effectively as a safe haven insulated from the political risks of doing business in the rest of China, there is no rationale for international businesses to be here”, he said. “They can either go direct to China, or base themselves elsewhere in Asia”.