Hong Kong under National Security Law; Some Pro-Democracy disband political parties

[jaichind]

Are they still going to hold elections this year?

The election is for sure on.  If anything various localism parties not being able to stand due to the new law makes the chances of an anti-establishment majority more likely since now the anti-establishment vote will be less likely to be splintered.  But in many ways the CCP does not care. They did what they did because they can justify it given the shift of the opposition to a more pro-HK independence stance.  They also need to cover their nationalist flanks of their own Mainland constituencies.  So as far as CCP is concerned they got what they wanted an the anti-Establishment captures a majority I do not thing that is that high on their priority list.

[jaichind]

After the July 1st protests plus a bunch of arrests the HK market is up 2.85%.  HK is now up almost 6% since 5/21 when the announcement came out about the new security laws.  Since end of May HK markets are up over 11% and have way outperformed Taipei, Tokyo and Soeul during the same period.   All things equal the view of investors is that the protests will peter out and the city will go its old goals of making money.

[jaichind]

I usually spend 2 weeks in APAC every year on a business trip which would include Tokyo, HK and Singapore.  I will not be able to make it this year due to the virus so I will not be able to get a on-the-ground look at what is going on in HK.  Of course most of the time there I would be spending time with my team so my observations would be limited.  My trip last year in Dec last year gave me the impression seems that the 2019 local elections got the marginal anti-Establishment voter to let off some steam and most likely the protest movement will go into decline.  The the virus crisis came so my theory was not really tested.  Too bad I will not be able to make observations this year.    Maybe next year.

[jaichind]

After the July 1st protests plus a bunch of arrests the HK market is up 2.85%.  HK is now up almost 6% since 5/21 when the announcement came out about the new security laws.  Since end of May HK markets are up over 11% and have way outperformed Taipei, Tokyo and Soeul during the same period.   All things equal the view of investors is that the protests will peter out and the city will go its old goals of making money.

Problem is, with Hong Kong losing any shred of autonomy, there's little reason now to treat Hong Kong any differently than Shanghai when it comes to financial matters. I've avoided investing in Chinese and Russian companies not because of disdain for autocrats per se, but because I can't trust the reported financials.

Also, I see you cherry-picked your period for comparison.
YTD, Hong Kong is doing worse than not only the three markets you've mentioned but also Shanghai.

I think the jury is sill out on the medium term economic impact of all this.  On the long run the surge of economic competitiveness of the PRC moving up the economic chain will of course deprive HK of is temporary entrepôt position.    The medium term future will depend on HK attracting international firms that need to tap into the Greater China market AND need high skilled labor force.  Right now the market rate for HK high skilled labor is quite high internationally (an for sure higher than London) and would attract and keep such labor force within HK.  All of these changes could of course change this dynamic. 

One metric that will allow us to measure this would be the expatriate work force in HK.  They tend to be quite mobile and will follow the money.  If they bail out of HK then would mean a shrinkage of labor talent leading international firms to pull out of HK due to lack of the skilled labor they need. That will in turn lower the HK wage for high skilled workers and a vicious cycle will begin.  It is very possible this will take place  but it is not certain.  I will for sure care a lot for personal and professional reasons.  In the meantime I suspect not much will change the next couple of years and any damage will be further out then that.

As for time-frames of stock market returns the best way to measure impact is to measure when an event is known. Ergo looking at at 5/21 is a good time frame since that is when the news of the new security law came out. End of May is a good time frame as more details and local protest response were known by then.  And of course 7/1 is a key date since that is the date the protest movement was going to show of their response.  For sure HK under-performed APAC EOD but what I am trying to measure is not HK as a whole but impact of this law on HK equities.  Even that is inexact as there are other factors but that it the best I can do.

[jaichind]

Until now substantial push-back to Bejing has been limited to the inner four of the Five Eyes Countries (UK, USA, Aus, CA), with Europe refusing to follow that line, due to commercial interests, especially those of Germany, in China, and internal divisions (Southern and Eastern member states being pro-China and threatening a veto, Greece and Hungary especially).

trying for a "common EU response", and not wanting "unilateralism" was basically the pretense of the German Government not to do anything that might jeopardize economic relations with Bejing, but eventually they have now caved to pressure (by the public and, presumably, the US). Germany will now, says FM Maas, implement, even if other European Countries do not follow suit:
(a) "easing of immigration restrictions of Hong Kongers" (though likely only symbolic changes, likely around asylum and student visas, not like what the UK has announced)
(b) extension of the arms embargo to Hong Kong
(c) suspension of the extradition treaty

https://www.spiegel.de/politik/ausland/hongkong-heiko-maas-kuendigt-reaktionen-auf-chinas-sicherheitsgesetz-an-a-d902e081-487d-4a5e-ba77-ed47e515d432

What happens now is everyone's guess. Likely the Pressure on other western member states will be high to do the same. China will feel that they have to make Germany pay a very big price for this, like with Australia, and more than with almost any country in Europe they certainly have the ability to do it, but you get to the point where you are beginning to escalate relations with too many of your export markets at once. Germany remains one of the relatively more pro-china countries in the West, split almost equally in the population between closer and less ties with China, and that is goodwill that the Chinese would be unwise to waste. Germany's Huawei decision is still being made, and China has big stakes in that. No side has interest in an escalation, so I think the reaction will likely remain with words.

The PRC under Xi is clearly deviating from the correct policy, in my view, as articulated by Deng:
韜光養晦，決不當頭 (hide your strength, bide your time, never take the lead).  The core issue is that these days the PRC leadership not as insulated from public opinion  as they were in the 1980s especially as it comes to foreign policy.   For Xi's regime to survive he must maintain a certain level of public support, something Deng did not have to deal with as much back in the 1980s.  This is leading to poor policy choices in my view and risk repeating mistakes in the 1930s under pressure from public opinion which led to conflict with Japan when a more rational policy could have avoided a costly war and set back Chinese economic development by decades.

[jaichind]

This is leading to poor policy choices in my view and risk repeating mistakes in the 1930s under pressure from public opinion which led to conflict with Japan when a more rational policy could have avoided a costly war and set back Chinese economic development by decades.

The only way for China to have avoided that costly war would've been to accept Japanese hegemony. Wang Jingwei was hardly a role model.

This was more about policy making in the early and mid 1930s.  Popular pressure pushed the KMT regime into a more confrontationist policy in terms of economic boycott as well as military pressure on Japanese occupied Northeast when in my view priority should have gone into economic development, eradication of radicals like the CCP etc etc as to form the basis of a conflict the drive Japan out of Japanese occupied Northeast a decade or two decade.  A conflict with Japan in 1937 was very ill advised as the ROC was nowhere ready to fight such a war from a military and economic point of view and led to very negative consequences in terms of economic development despite the ROC "winning" the war.     The crisis of 1937 could have easily been deescalated by both sides but public opinion on both sides pushed for a confrontational approach.