Hong Kong Special Trade Status: Why U.S. Restoration is Unlikely

It seems like it was a couple decades ago, but it was only about 5 years that I was last in Hong Kong on business. I was staying at a very nice upscale hotel (plenty to choose from) directly across from a massive port, marveling at the operations that seemed to go 24/7 with the incoming ships stacked with a mountain of containers. It was Port Hong Kong, one of the world’s largest ports, and it’s capable of handling 456,000 vessels per year and has a container throughput (in and out) of around 18 million TEUs. (Twenty-foot equivalent units)Up until the last couple of years, I had always viewed Hong Kong as a separate international gateway for trade coming into and going out of the Asia Pacific. For mainland China, it’s been a vastly important financial gateway, especially for the west and the E.U. (including Australia and New Zealand) to participate in its growth. Worth noting, 65% of Mainland China’s inward Foreign Direct Investment (FDI) comes from Hong Kong. That foreign direct investment however over the past two years has taken a back seat to the ongoing repression from the PRC. I spoke briefly about the recent exodus from Hong Kong in a recent podcast but failed to mention a few key statistics. The city’s population has now dropped from 7.41 million in mid-2021 to 7.29 million in mid-2022, according to the latest data from Hong Kong’s Census and Statistics Department. More than 113,000 residents left the territory in the past year, marking a 1.6% population decline. It is Hong Kong’s largest drop in population since record keeping began more than six decades ago. From Barron’s: Over 30% of respondents have had to delay new investments in Hong Kong, and 30% can’t fill senior executive roles. Over 40% of respondents say they are more likely to leave Hong Kong for personal or lifestyle reasons, while over 25% of companies say they are likely to leave Hong Kong. The exodus over the past year has been due to the political unrest, Xi’s crackdown on dissent, and of course, the rather insane zero covid policy, which has only recently been curtailed in Hong Kong and the mainland to not only allow local life to return to some semblance of normalcy, but to open the door for the Global Financial Leaders’ Investment Summit in Hong Kong on November 2nd to take place. More than a third of global fund management companies have moved regional and global posts out of Hong Kong. Many expats have also left, as they have felt imprisoned by the covid restrictions, as well as many mid-level and smaller companies who were stifled by the surveillance policies, and of course, the youth, who feel that Hong Kong no longer will allow them a freedom of speech and life in general to prosper without censorship. The continued brain drain that can be attributed to the exodus of Hong Kong’s more vibrant educated youth, and soon to be entrepreneurs will take a huge toll. Although they are being somewhat lifted, the zero covid restrictions battered mainland China’s already weakened economy, making it a long road back. It was somewhat shocking to see the major uprising in cities across the mainland calling for an end to the lockdowns, as well as Xi’s resignation. Many among the millions in revolt were also cussing at the government on Weibo in Cantonese, as its characters are not as easily recognized as Mandarin by the Chinese government’s army of censors. The model for this comes from Cantonese speaking Hong Kong which stands at 96%. Anti-government demonstrators in HK in 2019 often used Cantonese compositions of words and phrases both for protest slogans and to guard against potential surveillance. I would think that President Xi, at this particular time hopefully post-rebellion within the country, would at least consider that there is no such thing as “zero covid.” It doesn’t work in the real world. In the news this morning, they are again speaking of the dismantling of the policy, but I am less than optimistic that it will completely go away. The economic turmoil caused by the lockdowns in the mainland is a given, but it also affected the world’s economies with continued supply chain bottlenecks. Now is the time for the Chinese government to focus on rebuilding and adapt with a push on vaccinations. If we were on better terms, we could help accelerate that. Hong Kong’s vaccination rate is at 95% on the first shot, and 93% on the second. China has struggled to get the elderly population vaccinated, and as a result, they have had a tough time getting their rate to 89% recently. With the population in China being 1.4 billion, that 10% of unvaccinated people is significant, and the boosters are only at 56%, which has a lot to do with immunity to the new strains. Vaccinations aside, and back to the Benjamins, the million-dollar question is whether President Xi will actually see the light and allow Hong Kong to enjoy at least once again the perception of a somewhat independent system. I highly doubt it, but it would be the right move displaying a desire to conduct progressive business with the west, as we head into unchartered territory with a potential semi-cold war. We are not innocent in the creation of this dilemma, as the former administration under Trump implemented an immediate reaction to Xi’s obliteration of pro-democracy in HK, and the well documented first response, was to slap the Section 301 tariffs on all goods coming out of the nine container terminals in the HK port bound for the U.S. It’s now officially, “Country of Origin-China.” This new “Country of Origin” tag comes with a lot of additional baggage as well. The Forced Labor issue now in the limelight with U.S. Customs regarding imports from China will have an impact, and it’s worth mentioning, the newly launched BIS Export Controls on everything from semiconductors to high tech come into play. What was once a truly free trade port (HK), is now just another port in China. Two-way trade between the U.S. and Hong Kong in 2022, with only two weeks to go, is down roughly $10 billion vs 2021, and the trade war with mainland China isn’t showing any signs of heading in an amicable direction anytime soon. As a matter of fact, China will most likely be putting more retaliatory measures in place due to the more stringent Forced Labor mandate and BIS export controls the U.S. has implemented on high tech. Reflecting on the potential for more business losses in the future, it begs another question as to why Beijing feels the need to micromanage HK, besides the fact that they feel there is far too much western influence in the region. We (U.S.) get it, but wasn’t the status quo working well for all concerned monetarily speaking? The short answer is “yes.” So, diplomatically speaking, where did this feeling of freedom that needed to be squashed originate with HK? Is there a need for a historical review perhaps? How about just as a quick recap? O.K., history tells us that the sovereignty of Hong Kong was transferred from the U.K. to the PRC at midnight on the 1st of July 1997. This event concluded the 156 years of British rule. (BTW, to date, 52% also speak English in HK) Hong Kong was therefore established as a special administrative region, under the one party two system mandate supposedly being able to maintain its own economic and governing systems from those of mainland China. Obviously, not so much anymore, with the passing of the HK National Security Law in 2020. President Xi’s influence, via the blessing of an unprecedented 3rd term, has now reached supreme leader status in Beijing, and the thought of either Hong Kong, or Taiwan for that matter, being separate from the mainland, goes against his inevitable plan for reunification, where all will be assimilated as he makes known to the world the priorities for his 3rd term in power. (Key operative word here, “power”). Originally set to expire in 2047, the former arrangement had permitted Hong Kong to function as its own entity under the name “Hong Kong, China” in many international settings such as the WTO and Olympics. Worth mentioning, the Chinese renminbi is not legal tender in Hong Kong, but who knows, that may change on down the road, as well as Mandarin making further inroads to overtake Cantonese as the official language. The indoctrination of the teachings of Xi in the school system was rolled out a few years ago with an introduction to the political ideology of the Chinese President in its national curriculum. “Xi Jinping Thought” helps teenagers establish Marxist beliefs”, said the Ministry of Education. The ideology is integrated from primary school up to the university level. It’s not exactly a new era wave that is submerging all of society. If you would like to dig deeper on the topic, the books have been available for years written by Xi himself. “The Governance of China” was just released as a fourth volume in June of 2022. I cannot imagine a book being written by a President of the United States titled “Think Like Me”, during their time in office. It would be burned in piles daily until it vanished, quickly. As we are heading towards the PRHK (The Peoples Republic of Hong Kong) Xi does however recognize that there are definitive global ties in trade from Hong Kong to mainland China, from which both have benefited greatly, and therefore HK should be treated differently to some degree. Granted, it only represents about 2.5% of the overall GDP, but again, it’s a key financial hub allowing access to Foreign Direct Investment. Of note, at the end of 2021 Hong Kong’s stock market was off as much as 80% in IPO’s vs 2022 but is now finding its way back to the fourth spot among the world’s largest fundraising destinations for the first nine months of the year. With an even further loosening of restrictions it could boast of an even better performance in 2023. U.S. foreign direct investment (FDI) in Hong Kong (stock) was $92.5 billion in 2020, a 3.5 percent increase from 2019, but Covid’s impact on developing markets and shifting investment from China are major trends that have impacted foreign investment 2021- 2022. I also expect that Mofcom (Ministry of Commerce of People’s Republic of China) will be stepping in to scrutinize foreign investment for national security concerns and will be making some of its own rules against what it calls “unjustified extraterritorial application of foreign legislation and other measures.” You could insert “U.S.” right after the word “unjustified” in that statement. If Beijing can keep at least one semi-blind eye on the past success, as a separate entity Hong Kong has been unique in its trade arrangements with both mainland China and the world. Case in point, there is a free trade area between Hong Kong and mainland China (the Closer Economic Partnership Arrangement (CEPA)). There are also free trade agreements between Hong Kong and several other developed economies, including Australia, New Zealand, the ASEAN member states and the member states of the European Free Trade Association. So far, Hong Kong has signed eight FTAs with 20 economies. https://www.tid.gov.hk/english/ita/fta/index.html On the world stage, the top exports of Hong Kong are Gold, Broadcasting Equipment, Gas Turbines, Integrated Circuits, and Telephones, exporting mostly to China. Hong Kong’s largest trading partner by far is mainland China, followed by Taiwan, the U.S., Singapore, Korea, Japan, Vietnam, India, Malaysia, and Thailand. The fact remains, in the number 3 spot in global trade, the U.S. matters. Does the U.S. government have any vested interest in the current arrangement? Well yes of course, as we have strong economic roots in HK as well, and therefore need to consider what it means to bilateral trade with the mainland when we start imposing our will to keep China under control. There are some 1,300 U.S. firms, including 726 regional operations, and about 85,000 American citizens living in Hong Kong, although as previously mentioned, zero covid has more than chipped away at those numbers, adding to those who have parted ways with an authoritarian rule of law. Is there any room for compromise? Let’s call it “autho-democro” and allow Hong Kong to be the litmus test. When it comes to the direction the new world order is apparently taking, I think those hopes are more than waning. The once humble “Uncle Xi” does like to espouse these days how much he cares about Chinese citizens. In his dissertation at the party congress, he made sure that he mentioned “people” almost 180 times. If it was a drinking game, and we all had to take a shot of Baijiu every time he said the word “people”, we would all have ended up in the hospital from alcohol poisoning, if not dead, by the end of the speech. However, as the world watched these same “people” stampede in mass suddenly away from their place of business once it was announced that there was even one covid related infection (a sniffle perhaps as a symptom, but nonetheless a positive result on the test) in the immediate area, it didn’t look like anything even remotely close to a normal existence on the planet. As a matter of fact, it looked insane on the news clips regarding the desperation of the people moving in mass to break through the barriers of hazmat suit wearing government “testers.” People were suffering greatly on the mainland from the lockdowns, and subsequently the world economy followed. Let’s not go back there, regardless of what the Chinese mainland doctors are calling a mistake in the lifting the zero policy. Now back to government. For those of us who have been paying attention, it goes without saying, Xi’s master plan for the mainland, and for Hong Kong, was to use an anti-corruption campaign to purge hundreds of senior party officials who were not aligned with his goals for the future. Having his main predecessor escorted abruptly from the room during the recent congressional party session was a huge statement, even though we have seen news clips of him displaying that he is still alive. If it was a Kim Jong Un scenario, we would have seen the last of him when he was escorted out. Way to go President Xi on that note. There is one thing that Beijing should continuously remind themselves of, as they navigate the potential to further utilize Hong Kong for the gateway, and that is the success in the past, and quite possibly more in the future, will be directly attributed to less government involvement in the economy. However, I say, don’t just leave Hong Kong alone, but instead strive to put it back where it was when it peaked in 2015 with a huge spike in FDI, and the most robust environment pre-meddling. Allow it to continue to prosper based on what brought it to the forefront in world trade and finance in the first place. Of course, worth noting again, the challenge is that HK is in fact just another city in China which puts it into the same crosshairs of trade regulations with the U.S. as the mainland encounters, which seem to be compounding daily in the ongoing trade war. President Biden met face-to-face with Xi on 11-14-2022 at the G20 summit in Bali. After the three-hour meeting (I was wrong when I stated in a recent podcast that it would probably be just a fist bump, a monosyllabic grunt), at a short press conference President Biden shared that he felt as though he and Xi Jinping were “Candid and clear, across the board.” Take it for what it’s worth, as the firm reiterations of the so-called “redlines” that should not be crossed on either side are a work in progress. Nothing substantial in improving relations has been highlighted post discussion, and the Saudi’s just rolled out the red carpet for Xi and threw rose pedals at his feet, as a slap in the face to the Biden Administration. Obviously, the topic of Hong Kong and keeping it a viable and open market with the U.S. wouldn’t even make the top 20 in “a blueprint for improvement in trade relations” given the multitude of pressing issues to be raised, but it could be an example to both nations as to how things should work between the two largest economies on the planet. I look forward to who first extends an olive branch, and what form will that take. I personally think the U.S. could go first with the termination of the Section 301 tariffs, just to test the waters. If there is no reciprocity, the U.S. can always have them reinstated, after all they would once again be levied via a myriad of unjustifiable actions that “burden or restrict” U.S. commerce, as stated in the official Section 301 of the Trade Act of 1974. Some acts seem to never lose their luster. This just in from CNN: A 90-year-old former bishop and outspoken critic of China’s ruling Communist Party was found guilty Friday 11-25-2022 on a charge relating to his role in a relief fund for Hong Kong’s pro-democracy protests. Being worlds apart in ideology doesn’t bode well for unity in trade relations. Who am I kidding, but I wrote this piece anyway.

Is There Any Hope for Hong Kong to Regain its Special Trade Status with the U.S.? (It’s Officially Hong-China now)

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