China Defies Trump to Assert Control Over Hong Kong
As we start to return to some form of normality following the coronavirus outbreak, this week’s headlines were dominated by Hong Kong protests, US-China tensions and Brexit. Taking a welcome break from the coronavirus commentary as the epidemiology continues to provide encouragement for investors moving forward, this week we saw the re-emergence of key themes from 2019. After stepping up rhetoric against the Communist Party over its initial handling of the coronavirus, US-China tensions escalated this week as China renewed its efforts to tighten its grip on Hong Kong, resulting in the threat of US sanctions and further dissent in Hong Kong. At the same time, Brexit weighed on sterling while the UK government faced pressure over the actions of a key government aide during the lockdown.
China Approves Hong Kong Security Legislation
Over the week, Chinese lawmakers approved a proposal for sweeping new national security legislation in Hong Kong, defying a threat by US President Trump to respond strongly to a measure that democracy advocates say will curb essential freedoms in the city. The National People’s Congress approved the draft decision by a vote of 2,878-1 earlier today at its annual session in Beijing, with 6 abstentions. Chinese officials will now set about the details of the laws banning subversion, secession, terrorism and foreign interference before they’re given to Hong Kong’s Beijing-backed administration to enforce.
The move to bypass the semi-autonomous city’s local Legislative Council has alarmed pro-democracy activists and opposition politicians in Hong Kong, risking spawning more protests in the city as we have seen over the week. The new law may also prompt companies to flee if the laws undermine the independent judiciary in the Asian financial hub.
The plan to enact the national security legislation was first announced in Beijing late last week, with Chinese officials saying it was necessary to stem violent protests that hit the city last year. They argued that Hong Kong’s lawmakers had 23 years to pass the legislation, which is mandated under Hong Kong’s mini-constitution called the Basic Law. According to Chinese officials, the rights and freedoms of Hong Kong people remain unchanged, and the laws wouldn’t erode the rule of law, an independent judiciary or freedom of expression.
While last year’s protests were halted by the pandemic, demonstrators have come out multiple times since the announcement of the laws, defying police who are still limiting public gatherings. The laws have reignited calls for independence, a clear red line for Beijing. The new laws could turn demonstrators into criminals. Hong Kong shares have tumbled in the wake of the news, with the Hang Seng Index flirting with the lowest level since global strains peaked in March.
US-China Tensions Ramp Up
Tensions between the US and China have been escalating recently, with President Trump blaming the Asian nation for misleading the world about the scale and risk of the coronavirus outbreak, while also threatening action against China for cracking down on dissent in Hong Kong. On Wednesday, the Trump Administration took the significant step of saying that it could no longer certify Hong Kong’s autonomy from China, which was promised before the British handed the city back in 1997. China’s move to enforce new security legislation in Hong Kong is expected to prompt further reaction from the US, which could impose sanctions or provoke the city’s special trading status with the US. China has blocked US efforts to hold a UN Security Council meeting on the issue as relations between the two sides continued to deteriorate. Other governments have also expressed concerns over the new legislation. Japan said it was “seriously concerned” by the move, while Taiwan said it would release a plan to help Hong Kong residents if they wanted to leave the city.
As relations deteriorate, US and European markets have shrugged off renewed US-China tensions so far this year as the phase one trade deal remains in place, while the US presidential election in November could result in a change in US stance. Despite encouraging signs that the Chinese economy is beginning to recover from the coronavirus pandemic, Chinese shares declined over the week on renewed trade risks. The offshore yuan dipped, as it continues to test record levels amid speculation that the government would be willing to permit a weaker currency in response to fresh punitive measures from the US. Given existing pressures on the US economy, the US is likely to focus on financial sanctions and visa restrictions on Chinese officials while holding back on tariffs, export controls and investment restrictions for now.
For more information on signs of economic recovery in China, please see the attached Market Update document.
Brexit Talks Continue
After moving the spotlight earlier this year to focus the coronavirus pandemic, we are starting to see Brexit cropping up in the headlines once again. A parliamentary hearing on Brexit in London yesterday served only to rehash old positions, while there is little appetite in the EU27 to unpack the trickier issues that were sidestepped in the UK’s initial exit agreement. Although attention is returning to the issue, the Prime Minister and his team remain focused on the virus, and his senior adviser Dominic Cummings, who embodies the government’s take-it-or-leave-it negotiating style on Brexit, is battling to save his job after allegedly breaking lockdown rules. His role in Brexit also came up multiple times within the hearing.
Negotiations on the future relationship resume next week, with neither side expecting significant movement and the risks of talks reaching a stalemate rising. It is likely that we will continue to see further downward pressure on sterling moving forward as talks near the end of the year deadline. Without a deal, UK trade with the EU will face tariffs and quotas for the first time in decades, putting more pressure on businesses recovering from the coronavirus pandemic. It remains our view that focus will return to Brexit later in the year, with negotiations running down to the wire as with previous Brexit deadlines. Until then, we are likely to experience further volatility in sterling as the story unfolds.
Key Events We Are Watching This Week:
• Thursday: Euro Area Business Confidence and Economic Sentiment, US Jobless claims
• Friday: Japan & US Consumer Confidence
• Monday: China & US Manufacturing PMI
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document and the Economic Dataset below.
Model Portfolios & Indices
Global stock markets remained highly volatile over the week as the global economy grapples with the Covid-19 outbreak. Over the week, most of the major indices gained as optimism over a recovery in economic activity and central bank movements offset concerns over near term weakness. At the same time, markets in China and Hong Kong declined on increasing tensions after China renewed efforts to tighten its grip on Hong Kong, resulting in renewed protests in Hong Kong and an increase in US-China tensions.
The portfolios gained over the week as the portfolios benefitted from a high level of diversification, with equity and bond assets gaining over the week. Over the coming weeks, as we are now normally invested, we expect intraweek performance to be more in line with the benchmark once again, and we are optimistic on the medium-term outlook from here. The recent drop in portfolios and indices is hugely disappointing, however we remain optimistic about a growth pickup in the second half of the year, allowing us to regain lost ground.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 1940, British and Allied forces evacuated Dunkirk during WWII. Still regarded as one of the most successful rescue missions in history, the operation codenamed ‘Dynamo’ brought 338,226 men back to England, despite the initial modest expectation of saving a maximum of 45,000.
Have a great week and stay safe,
Jason & Gina