China’s Crackdown On Hong Kong Has Accelerated The Exodus Of Capital Out Of The Former British Colony; “China May Be Making The Same Hubristic Mistake As Tojo’s Japan: Overestimating Its Own Rising Strength; And Underestimating The Resolve Of The Dishevelled And Unruly Democracies.”
Back on March 9, 2020, at the onset of the Wuhan virus pandemic, Kyle Bass, Founder of Heyman Capital Management was interviewed on CNBC’s Squwak Box regarding his observations and thoughts on the geostrategic impact of the coronavirus. To access the full article, simply type in Kyle Bass in the search box on this blog, and that article will pop-up on your screen. During the interview with CNBC, Mr. Bass said that “China’s banking system is 3.5X larger than its GDP; but, Hong Kong’s banking system is almost 900 percent of its GDP — and Hong Kong has been basically shutdown. What we’re going to see is going to be much worse than what we saw in southeast Asia in the aftermath of the 2008 financial crisis — and China and Hong Kong is going to be the epicenter.”
Since Mr. Bass made that statement over two months ago, the situation in Hong Kong has only gotten worse. Yesterday, in anticipation of Premier Li’s remarks on Hong Kong at today’s National People’s Congress (NPC), Hong Kong’s stock market, the Hang Seng dropped 5.6 percent — its largest one-day loss in five years. One also has to believe that many of those who can, are moving at least some of their liquid financial assets to Bitcoin in an effort to shield them from Beijing.
As Ambrose Evans-Pritchard wrote in today’s/May 22nd edition of London’s The Telegraph, “China’s sweeping plans to strip Hong Kong of democratic autonomy spells the “death knell” for the enclave’s special trading and financial status, and will have grave economic consequences for China itself.”
“Hong Kong’s future as a global city is in doubt,” said Mark Williams from Capital Economics. “Without autonomy and an impartial legal system, Hong Kong risks being eclipsed by Shanghai in finance and other mainland ports in trade and logistics.” Mr. Willianms added that “optimists have long assumed that China benefits too much from Hong Kong’s current status as an investment and technology gateway to risk jeopardising the arrangement.” “Two-thirds of foreign direct investment flows into mainland China from Hong Kong,” Mr. Evans-Pritchard wrote. “It now appears that Beijing is willing to pay a higher price in order to contain the bacillus of democracy,” he added.
“The 1,400 U.S. companies operating there would drift away, many to Singapore,” Mr. Evans-Pritchard wrote. “So to would the 650,000-strong
army of foreign residents. The bustling enclave would risk the sort of steep decline that has befallen so many trade and banking centers over history — Venice, Antwerp, or Amsterdam — when political shifts robbed them of their unique advantage.”
“U.S. sanctions — or more accurately loss of privileges — would result in a 13 percent hit to the enclave’s GDP (including re-exports), and come at a critical moment when the tourist industry is on its knees,” Mr. Evans-Pritchard wrote. Hong Kongs economy contracted 8.9 percent in the first quarter of 2020.
And, “China is taking a huge economic risk, because it has not yet broken definitively out of the ‘middle income trap,’ and is badly overextended,” Mr. Evans-Pritchard wrote. The International Institute of Finance estimates that China’s debt-to-GDP ratio hit a record 317 percent in the first quarter of 2020. “The potency of new credit has been falling for a decade, and productivity has been slipping.”
“With an official unemployment rate around six percent,” Capital Economics says “the true rate is near 15 percent; and, a fifth of the country’s 300-million strong army of migrant workers have yet to return from their villiages,” due to the Wuhan virus pandemic. And even if they did, “there are simply not enough jobs,” for them to return to Capital Economics noted.
Added to all of these economic woes/challenges, is the fact that multinational supply chain diversification out of China was already well underway even before the Wuhan virus struck. That trend is likely to accelerate; and, Beijing’s move against Hong Kong is like lighting a match in a dynamite shed.
“Ironically,” Mr. Evans-Pritchard concludes, “China may be making the same hubristic mistake as Tojo’s Japan: Overestimating its own rising strength; and underestimating the resolve of the dishevelled and unruly democracies.” RCP, fortunascorner.com