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Hong Kong | Past The Point of No Return
From:
Albert Goldson Albert Goldson
For Immediate Release:
Dateline: New York , NY
Tuesday, August 13, 2019

 


I believe that the Black Swan moment I mentioned in an earlier blog is imminent as the Peoples Liberation Army (PLA) mobilizes along the Hong Kong border (the official explanation: training purposes) at the same time mass demonstrations are planned to occupy the Hong Kong airport again, an economic chokepoint.

The Economist article “Hong Kong Remains Crucially Important to China” 10 August 2019 discusses the exceptionally close economic co-dependency between Hong Kong and the PRC as well as changes since the 1997 agreement. To paraphrase these differences as indicated in the article:

·        With respect to changes, in 1997 Hong Kong’s economy was 20% of PRC’s. Today it’s about 3% as the PRC chase grown to be the world’s # 2 economy.
·        Hong Kong’s port plays a considerably lesser role.

Nonetheless Hong Kong provides a range of advantages that the PRC cannot match as paraphrased from the same Economist article below:

·         Hong Kong’s global status within international law and rules gives it easy access to western markets.
·         Hong Kong has the world’s 4th largest stock market by valuation and is responsible for 70% of the capital raised by mainland Chinese firms particularly tech firms such as Tencent, Meituan and Xiaomi. Unlike in mainland China, a Hong Kong listing enables mainland firms access to western investors.
·         Most Chinese foreign direct investment flows through Hong Kong.
·         The number of multinationals with regional headquarters in Hong Kong has increased 67% since 1997 to 1,500.

A comprehensive summary of the Hong Kong and mainland China economic dependency is articulated on the webpage Hong Kong and The Mainland of China – Some Important Facts provided by the Trade and Industry Department of the Hong Kong government. Below are additional facts supporting this co-dependency:

  • The PRC is Hong Kong’s largest trading partner since 1985 with a share of about 50%.
  • The PRC is Hong Kong’s largest supplier of goods since 1982.
  • Hong Kong is the PRC’s fourth largest trading partner (after the US, Japan and S. Korea) and second largest export market (after the US).
  • Hong Kong is the largest investor of foreign direct investment in the PRC.

In an article published 8 August 2019 Mainland China’s Economic Pacification of Hong Kong I provided a summary of various investment vehicles specific to Asia that could be vulnerable to severe downward pressure should the Hong Kong situation take a turn for the worse.

Because of Hong Kong’s preeminent role in international finance as the world’s # 4 stock market by valuation and its critical economic co-dependency with the PRC, the world’s # 2 economy, any intervention will adversely impact global markets in all sectors such as the Dow Industrial Index (INDEXDJX: .DJI), S&P 500 Index (INDEXSP: .INX) and Nasdaq (INDEXNASDAQ: .IXIC).

The Gold Play

Assuming that the PLA intervenes gold prices will spike as investors scramble the historical “flight to safety” investment. Gold will remain at elevated levels for the short to medium term as Hong Kong is eliminated as a reliable international financial center from the world markets.

The End Game

From the PRC’s prospective the proverbial beast of pro-democracy not only is out the cage but has been running amok for over two months growing in size and confidence and not so subtly making demands of outright independence. In a pincer attack the more violent demonstrations have boldly targeted government buildings and police stations as a political statement meanwhile ironically initially more peaceful but has suddenly turned violent with broader demographically based demonstrations have targeted the airport which has severely disrupted Hong Kong’s economic lifeline.

The crisis is far beyond the point that the resignation of Hong Kong’s chief executive Carrie Lam or the cancellation of the proposed extradition law, none of which will pacify the citizenry. The demonstrators are “all in” for pro-democracy that is pushing the Hong Kong law enforcement to the brink of exhaustion. The fuse has been lit. It’s the PRC’s worst nightmare. For this reason direct military intervention is their only option to prevent total chaos with the post-intervention focus on damage control.

Scenario # 1: The PLA enters and occupies Hong Kong under a state of emergency forbidding any and all dissent. The citizenry halts their demonstrations with the exception of minor skirmishes by diehards. Global markets will fall precipitously but rebound somewhat due to minimal violence.

Scenario # 2: The PLA enters and occupies Hong Kong under a state of emergency that infuriates the citizens. Violence escalates that challenges the PLA’s ability to maintain law & order, provoking the PLA to use highly aggressive methods resulting in a Tiananmen Square déjà vu. Global markets will crash.

Recommendation

The political and economic stakes could not be higher. I believe that this is a run for the exits play that goes far beyond the Asia markets. For those with a robust financial fortitude for risk, shorting almost any investment or fund with a strong Hong Kong or PRC presence could yield impressive returns.

Additionally for those wishing to gain a more comprehensive understanding of the fierce political undercurrents, my firm Indo-Brazilian Associates LLC has created a report entitled Hong Kong Outlook that includes a series of published articles on this matter.


Indo-Brazilian Associates LLC is a NYC-based boutique advisory and think-tank that provides international investment  & security risk assessments.

Copyright 2019 Indo-Brazilian Associates LLC. All rights reserved.





 
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