Hong Kong: a step further down in the relation between China and the USA

5th August 2020
-News, IAM

Hugues Chevalier, Economist

The new security law put in place by the Chinese government in Hong Kong on July 1 continues and will continue to have a significant negative impact on the relations between China and the rest of the world and on the economic and financial activity of the former British colony. Indeed, the President of the United States has just signed a decree terminating Hong Kong’s preferential trade status. This territory is now being treated by the Americans like the rest of China with the introduction of customs duties on its exports. Hong Kong was until now a centre of exports of Chinese products and financial services. The new customs duties on exports will of course impact the island activity, but the consequences on the financial sector will be much harder for the territory. Indeed, the end of Hong Kong’s preferential trading status means above all a direct impact on the financial and banking system, which until now has benefited, among others, from a fixed exchange rate regime against the dollar. Some banks have already announced they might leave the territory following the US sanctions. In addition, Hong Kong could lose its fourth position in the rank of the world financial centres. The US sanctions targeting Hong Kong are just one more episode in the China-US conflict. We have already the trade war, the controversy over the Covid-19, the geopolitical situation in the South China Sea, which 90% are claimed by the Chinese, the case of Huawei and the situation of the Uyghurs. Hong Kong is therefore the next step of the “cold war” between the two superpowers. But its consequences on world trade, on the economic and financial stability of the region and on world stock markets are beginning to be very worrying.