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The removal of Hong Kong as a buffer between China and the West has put two “conflicting regimes” on a collision course, an academic says. Photo: Warton Li

Donald Trump’s plan to strip Hong Kong of its special status is light on detail, but economists still fear for city’s future

  • City’s trade with US is small, but some warn White House moves could reduce its importance as a financial centre
  • Markets shrug off White House address, but questions about export controls, trade tariffs and enhanced financial oversight loom large
United States President Donald Trump announced on Friday that he plans to begin stripping Hong Kong of its special trading status, but left many important questions about the city’s future as a financial and commercial hub unanswered.

The move will affect “the full range of agreements” the US has with Hong Kong “with few exceptions”, including its extradition treaty with the city and economic privileges enshrined in US law that differentiate it from mainland China, Trump said in the Rose Garden at the White House.

“We will take action to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China,” said Trump, indicating that the State Department’s travel advisory for the city would be updated “to reflect the increased danger of surveillance and punishment by the Chinese state security apparatus”.

The US would also take steps to sanction Chinese and Hong Kong officials “directly or indirectly involved in eroding Hong Kong’s autonomy”, he said, echoing the language of legislation enacted in November that requires a punitive response from the executive branch in such circumstances.

US President Donald Trump, with US Secretary of State Mike Pompeo, during a press conference on May 29, 2020. Photo: AFP

Hong Kong officials played down the impact of Trump’s vow “to revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China”, noting the city’s direct trade with the US is only a very small part of its economy.

Trump did not set a timeline in his announcement , nor did he provide specific details as to which economic privileges would be removed, leaving uncertainty over what the US would actually do.

“This is definitely not positive, but we do not have the full details yet,” said John Marrett, a senior analyst covering Hong Kong at the Economist Intelligence Unit. “There were more details on other aspects such as visas and immigration. We will have to wait and see if his bark is worse than his bite.”

With Hong Kong mainly serving as an entrepôt for the mainland Chinese market, direct trade in goods forms only a minor part of the economy. Its own manufactured goods could be subjected to US trade war tariffs, but the effect would be minimal.

Hong Kong’s government had anticipated “all the different scenarios” of Trump’s announcement, said Hong Kong Finance Secretary Paul Chan Mo-po, adding that revoking the city’s special treatment status would have little impact as the local economy was dominated by the services sector.

Questions also remain as to whether the US can avoid sanctions on the financial sector because of the negative impact it would have on American firms.

Nonetheless, the move will sharpen pre-existing anxieties about Hong Kong’s long-term viability as Asia’s premier business hub.

Potential controls on access to American tech goods may also damage China’s plan to use Hong Kong as an R&D and financial spoke of its Greater Bay Area blueprint for South China.

“The biggest consequence is that the US decision is accelerating both the demise of Hong Kong’s importance to China and the world, as well as the decline of China’s economy,” said Chen Zhiwu, director of the Asia Global Institute at Hong Kong University.

The removal of Hong Kong as a buffer between China and the West had put two “conflicting regimes” on a collision course, he said. “When this mitigating role is gone as Hong Kong becomes just another city of China, the clash will be 100 per cent direct and literally face-to-face, which is detrimental to China’s development and undermines its ability to rise, peacefully or otherwise.”

Earlier in the week, sources close to the White House said that revoking Hong Kong’s status was the “nuclear option”, which was on the table but likely to be kept in reserve.

Taken to its full potential, Hong Kong will lose its special customs status, but remain a free port and World Trade Organisation member, meaning it will continue to trade on most-favoured-nation terms with the United States.

“The US’ move to discontinue the separate trade status is more significant in the context of US export controls than it is with broader trade in goods,” said William Marshall, an export controls specialist at law firm Tiang & Partners. “Hong Kong will be subject to those controls applicable to China, which would certainly negatively impact China's vision for Hong Kong as an R&D hub under the Greater Bay Area plan.”

The peg of Hong Kong’s currency with the US dollar, in place since 1983, is unlikely to be affected, as

the local government is sufficiently well armed with US dollars to support it.

“The peg is very unlikely to be in danger. In the short-term, we could see increased volatility in capital flows and the Hong Kong dollar exchange rate against the US dollar, especially if the US government were to take bolder action on Hong Kong’s special status,” said Louis Kuijs, Asia economist at Oxford Economics.

“It is possible to see the HK dollar-US dollar exchange rate to hit the weak side of the trading band as a consequence. However, we think that the peg with the US dollar is unlikely to succumb, given the sheer size of foreign exchange reserves, at US$441 billion in April, is twice the size of the monetary base,” he said.

Crucially, uncertainty regarding the city’s future as a global financial centre could “potentially jeopardise the ability of Chinese firms to access financing and purchase overseas deals” out of Hong Kong, said Carlos Casanova, Asia-Pacific analyst at insurance firm Coface.

About half of China’s total outbound investment flows through Hong Kong, with some of the world’s biggest deals over the past decade financed via the city, which also acts as the largest source of inbound investment to China.

Markets took Trump’s pronouncement in their stride. The Hong Kong dollar strengthened after the announcements, while the Hang Sang futures index was up 0.6 per cent on Saturday morning. Meanwhile, Chinese stocks listed in New York, including Alibaba (which owns the South China Morning Post), Baidu, and JD, all rose in Friday trading.

Tara Joseph, president of the American Chamber of Commerce Hong Kong, said that Trump’s announcement “did not mean US companies will be flipping a switch in Hong Kong and running for the exits”.

“There are many unanswered questions about how the US-Hong Kong special status could be unwound. The more clarity business receives, the more helpful it will be at this challenging juncture,” she said.

This article appeared in the South China Morning Post print edition as: UNCERTAINTY as Trump vows end of special status