Donald Trump Signs Hong Kong Bill

Alan Penny

28 November 2019

3 min read

Collision of two containers representing the US and China

  • Bill signing prompts criticism from China
  • Brings in “safe haven demand”
  • What next for China-US trade relations?

Before taking off for the Thanksgiving Day holiday, President Donald Trump signed the so-called “Hong Kong Bill” in the United States, much to the chagrin of China.

China vows retaliation, but that’s more than likely going to be empty promises

The legislation is a direct challenge to Beijing ruling Hong Kong, which of course doesn’t play well with the Chinese Communist Party. However, the reality is that China has much bigger problems than the United States Congress.

China vows retaliation, but that’s more than likely going to be empty promises. While the Chinese certainly don’t like this scenario, the reality is that the bill only provides lip service to the idea of Hong Kong remaining separate but equal in the eyes of the United States.

Hong Kong is reviewed yearly as to what kind of trading partner it is, and this has been further extended. Beyond that, the bill signed denies the selling of non-lethal and lethal weapons to Hong Kong police/military and signifies the US Congress’s support for the protesters.

Market reaction negative

After the announcement, the markets did exactly what people thought they would do: they ran towards safety. Safety came in the form of gold prices rising, the Japanese yen being bought, as well as the Swiss franc gaining a bit of ground.

This was a complete reversal of everything that had happened late in the US session the day before, but these reactions have been somewhat muted due to the fact that liquidity may have been an issue. Because of this, the reaction may be a bit exaggerated.

What’s next for China-US trade relations?

The news begs the question What’s next for China-US trade relations? While this cannot be a good thing, China has much more to worry about than some symbolic gesture by the US Congress across the Pacific Ocean.

That being said, the market is waiting with bated breath. But the reality is that China has seen an economic slowdown, something that the Chinese Communist Party cannot afford.

China has a sort of “social contract” with its people as it has seen extraordinary growth over the last four decades. The problem is that if the growth goes away, the people become very unhappy. While we are a long way from major social unrest, as long as the trade war persists, it will continue to press China and its most sensitive spots.

Because of this, the Chinese Communist Party has very few ways to retaliate in reality. Even if it were to do so, it’s likely that trade talks will continue, not necessarily because China wants to, but because it has to.

A simple glance at the most recent economic figures shows that China is clearly on the receiving end of trade war punishment. After all, just 24 hours ago we received very good US economic figures in the form of Durable Goods Orders and GDP.

At this point, expect some symbolic retaliation, but nothing of substance. The trade talks continue.

Written By
Alan Penny

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