Published: May 25th, 2020
The Sino-U.S. relations is a tight rope; one moment it is all giddy and rearing to go and the next moment it is belly up in a ditch. Last week, it stumbled on a huge bump; the reason being, China proposed a security regulation on Hong Kong and Uncle Sam got mad as a result. Because of the simmering tensions, investors sought safety by looking for traditional safe havens. The result was a surging dollar during the early Europe trading session on Friday, May 22.
The simmering restless relations between China and the U.S. flared following news that Beijing had imposed a new security law on its special administrative region, Hong Kong. The tension created a momentary demand for the greenback as investors rushed to evade losses on risky assets.
The U.S. Dollar Index, a measure that tracks the greenback’s performance against a collection of six other prominent currencies rose by 0.2% to stand at 99.627. Cable (GBP/USD) and Fiber (EUR/USD) both tumbled by 0.2% to stand at 1.2203 and 1.0925 respectively.
The new tensions prompted President Donald Trump to issue a stern warning. He went all out, telling China that Washington will not hesitate to react strongly if Beijing sought more control over its semi-autonomous region on the Pearl River Delta.
While the dollar was surging, the Chinese currency dived. The yuan shed some of its previous gains after Beijing decided to scrap this year’s economic growth target. The decision rattled the markets by strengthening concerns that the destruction caused by the coronavirus pandemic may take a lot longer to put back than had earlier been anticipated.
During Friday, May 22 early morning trading session, USD/CNY stood at 7.1238, a two-month high, and an increase of 0.1%. The offshore yuan, a more pliable version of the Chinese currency, fell as well, touching the two-month low. The Aussie which money markets consider as an arbitrary proxy for the demand of Chinese products, lost 0.6% becoming the day’s biggest loser.
Sino-U.S. tensions have many causes. While the protracted trade deal that now seems on track was the biggest source of confrontation, the two countries have several issues that they do not quite agree on.
Washington, for instance, is opposed to the Chinese telecoms giant Huawei Technologies accessing advanced technology. Moreover, the Trump administration is not amused by how Beijing responded to the coronavirus outbreak.
According to Yukio Ishizuki, an FX strategist at Tokyo’s Daiwa Securities, the U.S. and China have had problems for a long time now. He says, however, that the issue is exacerbated by some short-term players who prefer to change positions every so often. Yukio said that this constant shift in position makes it difficult for the markets to correctly predict the trends. He, however, added that in the meantime, the dollar looks supported.
While currencies managed just modest drops as a result of the China-Hong Kong-U.S. altercation, the former British colony’s stock market took the recent developments more severely. Hong Kong’s position as the Asian continent’s financial capital was severely challenged by the new arguments.
The Hang Seng closed last week’s trading 5.6% lower, which is the index’s worst performance for one day in almost five years. China’s threats created fear among investors that Beijing’s show of legal will rekindle mass protests in the former British colony and disrupt the working relationship that has since been established between the U.S. and China. And predictably so, Hong Kong residents responded to the announcements by taking to the streets in their thousands on Sunday, May 24.
Investors in Hong Kong admit that the late-night announcement found them unprepared. Now, they are a concerned lot. They fear that the announcement may strip the territory of its preferential commerce status in the eyes of Washington. Kenny Wen, a strategist at Everbright Sun Hung Kai, a Hong Kong-based brokerage said that the key concern now is whether the proposed national security law will interfere with Sino-U.S. relations. He added that a further drop in the stock market will likely occur because of the protests that the announcement ignited.
Louis Tse, the managing director of Hong Kong’s VC Asset Management said that Beijing’s proposal may be nothing more than a threat. While admitting that the announcement surprised traders, he said that China has every reason not to alter Hong Kong’s financial system. Louis says that Beijing’s interests are best represented when Hong Kong is semi-autonomous as it has always been. If altered, it stops being the springboard through which Chinese companies can raise funds offshore, Louis added.
The asset manager equated Hong Kong to an ATM where China keys in its password and gets the money. He said that China will have to think hard before it even thinks about expressing its legal might over the region via the proposed law. Meanwhile, MTR Corp, the company operating the metro system in Hong Kong was the day’s biggest loser. The company’s vulnerability became obvious last year when protesters targeted it during the anti-China demonstrations. Its 7.7% drop at the close of the week made it the worst performer in the Hang Seng board.
Though the details of the proposed laws are yet to be disclosed, the sudden move ignites fear that the Communist Party of China is willing to go to whatever length to muzzle the freedom that Hong Kong gained when Britain handed the territory back to China in 1997.
Some of the fears that the Hong Kong business community now contemplate include how easy it would be to transgress the bounds of the ambiguous and traditionally broad spectrum of the Chinese national security laws.
China announced last week that it was planning on stamping its legal might over Hong Kong by enforcing a national security law. The sudden and unexpected move flared simmering tensions between the populous Asian nation and the U.S. The said tensions pushed down the Hong Kong stock market. The U.S. dollar, however, took the opportunity to rise above most of its peers with the Australian dollar losing the most traction.