• China will soon enact a new national security law in HK
  • US may lift special trade status for region as autonomy reduces
  • 1,300 U.S. firms with operations in the city

As countries reopen and new cases slow in the U.S., trade war tensions are back in the news, picking up from where we left off with new instigations and new threats. China and the U.S., the two largest economies in the world are disagreeing on many matters (financial markets, human rights, the origins of COVID-19) but the battleground is now Hong Kong, the "Pearl of the Orient."

Yesterday China ignored international warnings and passed a national security law that greatly increases its influence over Hong Kong. Expected to be enacted before September, few details are known besides that it will bypass the local legislature and allow Chinese intelligence agencies to set up bases in the semi-autonomous region. Critics fear it will curb the essential freedoms and rights of residents in the financial hub.

President Trump held a press conference today to announce how his administration plans to penalize the Asian country. Those measures include, for now:

  • The U.S. will terminate its relationship with the World Health Organization
  • The U.S. will suspend entry of certain students and researchers into the country
  • The U.S. is studying Chinese firms' accounting practices
  • The U.S. will eliminate special economic status for Hong Kong

Financial War

Shares in financial companies operating on a large scale in the city, like HSBC and Prudential Plc, fell in London and there's talk of a brewing financial war between the U.S. and China. U.S. political strategist Greg Valliere said China hawks in the Trump Administration are proposing sanctions on foreign banks and corporations that deal with Hong Kong banks. He wrote, "Much of China's banking is conducted in Hong Kong, mostly with U.S. dollars. Could the U.S. penalize foreign banks that deal with Hong Kong banks? Could the U.S. deny Federal Reserve credit lines to Chinese banks? Could foreign banks get cold feet in dealing with U.S.-sanctioned firms?"

The U.S. Secretary of State has recommended Hong Kong lose its special customs territory status, which means tariffs and sanctions can be imposed. The total value of U.S. goods and services trade with Hong Kong was $66.9 billion in 2018. Exports were $50.1 billion, and imports were $16.8 billion. The U.S. goods and services trade surplus with Hong Kong was $33.4 billion in 2018.

Why a Free Hong Kong Matters to the US

Hong Kong's Beijing-approved leadership has warned the U.S. against interfering in internal matters, said any sanctions imposed on Hong Kong will be a "double-edged sword" and reminded the U.S. that its trade surplus with Hong Kong is the biggest among all its trading partners.

What exactly are U.S. economic interests in the Asian financial hub?

  • Hong Kong is seen as a gateway to Mainland China for business and investment
  • 1,300 U.S. firms (including 726 regional operations) are based in the city
  • It is a re-export hub for trade between U.S. and China
  • 85,000 Americans call it home and new visa rules could affect them

"Far-reaching changes to Hong Kong’s status under the U.S.-Hong Kong Policy Act as a separate territory in economic and trade matters would have serious implications for Hong Kong and for U.S. business, particularly those with business operations located there who exercise a positive influence in favor of Hong Kong’s core values," said the U.S. Chamber of Commerce in a statement this week.

Hong Kong’s economy was rated the freest in the world from 1995 through 2019 by the Heritage Foundation before it lost its position to Singapore due to the political turmoil. Nearly 200 banks with offices or headquarters, including 75 of the largest 100, from 35 economies are present in the city.