Rabobank: How Does Hong Kong Continue To Function As A Financial Center?

Submitted by Michael Every of Rabobank

“Great Uncertainty”

If there are two things markets hate today they are a lack of central bank liquidity and uncertainty. Well, we have lots of the latter.

The National People’s Congress (NPC) that just kicked off in China has seen Premier Li Keqiang admit “We have not set a specific target for economic growth this year.” China economists will have to actually try to predict what growth will be in 2020 for the first time in a generation. This is because China “will face some factors that are difficult to predict in its development due to the great uncertainty regarding the Covid-19 pandemic and the world economic and trade environment.” But China has beaten the virus, hasn’t it? We are all rolling back lockdowns elsewhere, aren’t we?

Of course, this being China there were some hard targets of the Panglossian variety. There will be 9 million urban jobs created and every effort will be made to stabilize employment. This is clearly the new policy goal – not growth. Certainly not productivity given it means massive labour-intensive public investment in what is no longer a low-wage urban economy, or propping up failing firms to save jobs.

The fiscal deficit, reported by Bloomberg with a straight face as usual, is going to widen from 2.8% of GDP to 3.6%. This despite nobody pretending to know what GDP will be, and that too many pretend this covers ALL the public-sector deficit when the IMF says it is 10% if you include local governments, which you must unless you want to imagine vast defaults ahead. There is talk of issuance of CNY3.75 trillion in “special” bonds, up from 2.15 trillion in 2019, and CNY1 trillion in sovereign bond issuance. Yet that is a drop in the ocean compared to what the US or even the UK are spending relative to GDP. Indeed, the South China Morning Post yesterday ran a story suggesting a larger fiscal stimulus is coming soon than was seen post-GFC. If so, as we keep saying, watch CNY very closely.

Monetary policy will remain “prudent” and “flexible” and “appropriate”. At the same time, steps will be taken to “ensure enterprises can secure loans more easily and promote steady reduction in interest rates” and money supply will be guided “significantly higher” as loans to SMEs now have to rise 40% in 2020 after mandated 30% growth in 2019. Has this rhetorical left hand ever met the right hand? Again, watch CNY – because boosting local money supply that fast, and to struggling firms, and with no FX reserve gains, means one thing and one thing only.

On which front, Li also stated that the phase one US-China trade deal is going to be stuck to. Really? Because it is way behind target already, and we already saw news this week of a vast digital Keynesian plan to push ahead with local chip development to replace those of the US. (Australia is also experiencing the odd trade-related issue as well.) Nonetheless, the markets got the headline they wanted – which I doubt was a coincidence.

Meanwhile, one key China problem is not based on uncertainty but on certainty. Beijing will be directly imposing a draconian national security law on Hong Kong, bypassing the local legislature entirely. Many voices are calling this a fatal blow to One Country, Two Systems despite the NPC saying otherwise; one local law-maker is quoted as saying “This is the end of Hong Kong.” Moreover, it comes just as the US concludes its mandated –and specifically delayed– annual appraisal of Hong Kong’s autonomy, which is now guaranteed to generate a swift response, something US President Trump has already publicly promised.

Indeed, bipartisan legislation has just passed the US senate to impose sanctions on Chinese individuals and entities in Hong Kong responsible for implementing this law, and for any banks who deal with them. Yes, it needs to get through Congress and be signed by Trump: but that seems easily done based on past record and present atmosphere. Then we would have to see who the US would hold responsible: token individuals or the entire arm of the Chinese state?

If so, how does Hong Kong continue to function as a financial centre? (And/or with mass street protests again?)

The fact that Beijing is prepared to push ahead with such a step knowing what the response will be, and what that could mean for Hong Kong –and for US relations with Taiwan– should be of deep concern to markets.

But back to the ‘relief’ of uncertainty:

• The Fed’s Clarida yesterday said more fiscal and monetary support may well be needed, with the emphasis on the former. Fed Chair Powell said the US faces “a whole new level of uncertainty…those taking the brunt of this fallout are those least able to bear it.”;

• A survey in the UK suggests 30,000 pubs and restaurants will not re-open after the lock-down is lifted;

• The BOJ has announced a new loan program taking total commitments to JPY 75 trillion (around USD700bn) to support small businesses; that’s as April data show deflation is back again; and

• The Reserve Bank of India made an emergency rate cut of 40bp to 4.0%; and it will start buying debt from shadow banks, as it did during the GFC.

Happy Friday! At least the days of the week are still certain for now. Though recall after the French Revolution they even got rid of those