While we’ve being getting all angry about the UK elections, and who said what in the White House, we’re likely focusing on the wrong stuff.  I reckon a trade deal is further away than ever. The current crisis point that could impact global markets is Hong Kong, and there are two fundamentals to factor at present:

  1. What will China do?
  2. What will be the Occidental response?

Many commentators are taking a pessimistic view, and predicting a brutal outcome; a repeat of Tiananmen Square in Hong Kong, citing China’s need to demonstrate its’ dignity and prestige, and maintain the concept of “mainzi” or “face”.  Such a reaction would be blunt and extremely challenging to the West.

An escalation would certainly destabilise the outlook for the global economy, pushing the current trade skirmishes into a full scale trade war right up to sanctions.  Further images of state supression in Hong Kong will build consensus across the West – no matter how damaging to growth.

The Chinese know their claim to be the only and final determiner of Hong Hong’s constitutional legislation puts it in direct challenge with the US.  Although it will infuriate Beijing, Trump is expected to sign House legislation supporting the protestors – it requires annual certification that Hong Kong remains independent of china to retain its “favoured nation status”.  It’s likely to be another reason China isn’t set to budge on trade.

No one is quite sure how Xi will respond to the challenge – everyone is guessing.  (The Chinese might even be front running the expected Western reaction!)   Yet the Chinese have time on their side. Rather than knock out blows, perhaps they will employ a strategy of a million flea bites to win Hong Kong for China.  It would certainly confound the White House.  This article in the NY Times explains how China mounted a similar campaign againt the Muslim Uighur minority in Xingjiang – its chilling, and despite protests, it will likely work.

China under Xi is a nascent empire – with Chinese communist characteristics.  Mainzi and power projection is important, but a response today is likely to be significantly more nuanced than we saw 30 years ago, and more mature.  China has significant tools: electronic and media surveillance can work alongside already strong and loyal Chinese HINTEL resources within Hong Kong, including the now suborned Police force.

The fact Alibaba chose Hong Kong over Shanghai for its successful secondary listing shows Hong Kong still has value as China’s financial centre and gateway – why risk alienating it further?  Rather than a dramatic clamp down, all China needs to do is keep up the pressure. They don’t want to compromise Hong Kong as a market hub.  There are few signs of domestic China support for the Hong Kong dissidents – it’s completely unlike the student protests of 1989 in Beijing that could have destabilised the whole nation if not checked.

However, the protests will still require China to act.  They just have to make sure they do so within acceptable parameters that won’t trigger international ire – that’s going to be a very delicate balancing act that will keep Occidental relations with China tense for years.

China may decide to apply pressure but not blows via its proxy legislative council and the Hong Kong Police. Like in Xinjiang, they won’t do anything dramatic, but make it increasingly uncomfortable. Demand the rule of law – like anti-mask rules – is followed, and respond quickly to requests for assistance, mainland troops, and support from the legislative body. China will argue it is not intervening, merely keeping the colony peaceful. Who can complain as protestors start to get pulled off the streets in greater numbers?  It’s a domestic China affair. I’m afraid the rioting students don’t get a vote.

Carrie Lam’s law to allow the extradition of criminal cases for trial in China won’t be reintroduced – its apparently already happening. Reports relating to the recent imprisonment of a British consulate worker held on trumped up prostitution charges while visiting China speak of rioters already being held in Chinese jails.  They admit their guilt in return for reduced sentences, are allowed to return home with a criminal record, and then leave Hong Kong of their own free will – which suits China perfectly. Every Hong Kong student who flees to Canada allows China to move in loyal mainland supporters – just as they do in Tibet.

Rather than a shock, China can afford to play a longer game, sniping down the insurrectionists one-by-one – the million flea bites.  China is certainly less afraid of the west objecting.  Although it’s still perhaps a bit early in terms of their military build-up and economic power projection for an all-out trade battle with the West, China is strong enough to fall back on internalising their domestic economy, secure in the knowledge they can endure an economic war, and that its likely to be short term as the west will suffer a downturn – bringing them to the negotiating table.

China probably can’t win such an economic war – the West will have to lose it by blinking first.

China’s policy on Hong Kong may become apparent when the riots inevitably wind down, and if vast numbers of young people leave Hong Kong, allowing the authorities to retain its business/financial base while making it a more Chinese City. That’ will be a far more convincing win for Xi that sending grieving Hong Kong parents bills for the bullets used to murder their children.

Bill Blain is a well-known City of London commentator, and has 35 years’ market experience as an investment banker. He currently is Strategist at Shard Capital, a London-based boutique.

Republished from the Morning Porridge by permission.

Photo: Studio Incendio via Flickr (CC BY 2.0). Picture cropped. 

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