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OpinionOpinion: How the Hong Kong crisis could trigger a wider financial meltdown

20:40  14 august  2019
20:40  14 august  2019 Source:   marketwatch.com

HK activists, Beijing supporters demonstrate in London

HK activists, Beijing supporters demonstrate in London Demonstrators backing the democracy activists in Hong Kong marched in London on Saturday, as counter-protesters staged a rival rally. 

Opinion: How the Hong Kong crisis could trigger a wider financial meltdown© Anthony Kwan/Getty Images Protesters occupy the departure hall of the Hong Kong International Airport on Aug. 12.

Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not necessarily represent the views of MSN or Microsoft.

Until recently, stock markets were having their best year to date since 1997. That was the year when markets were up some 25% in the first seven months — and then the Asian crisis struck. An initial ripple in the Thai baht spread financial contagion across a leveraged Asian economic region, and in turn led to steep losses in U.S. markets.

Hong Kong braces for fresh protests as marchers set to defy police ban

Hong Kong braces for fresh protests as marchers set to defy police ban Hong Kong braces for fresh protests as marchers set to defy police ban

With riots on the streets of Hong Kong and its airport disrupted, could another crisis strike now?

Though only a small city-state, events in Hong Kong should rouse Americans because of the threat to democracy there, and also the considerable risk of international financial and economic contagion. American investors should pay greater attention to the implications of what is happening halfway around the world.

The city is an emblem of the age of globalization, a trend that was in full flight in 1997. Globalization has now run into the limits of its own success; at best it is now slowing and at worse has come to an end.

My strong view is that globalization is being replaced by a multipolar world. As this happens, political and economic fault lines will become more exposed. Italy, where the economy has stagnated for two decades and populist Matteo Salvini is on the ascendancy, is a case in point; the same may be true for Dubai, a trade entrepôt with an exposed property market. Hong Kong is very much an example.

China to Boost Shenzhen’s Role in Greater Bay Area Innovation

China to Boost Shenzhen’s Role in Greater Bay Area Innovation China plans to let Shenzhen City, which borders Hong Kong, play “a key role” in science and technology innovation in the Guangdong-Hong Kong-Macau Greater Bay Area, according to state media. Shenzhen will be granted favorable policies including privileges in yuan internationalization, China Central Television reported on Sunday, citing guidelines issued by the Chinese Communist Party central committee and the State Council. China will also promote the connection of the financial markets of Shenzhen, Hong Kong and Macau, including with regards to fund recognition. No details were provided.

The extradition bill proposed by the Hong Kong authorities that has triggered these protests would allow residents to be extradited to China. It has for the first time catalyzed a choice in the minds of many residents — both young and increasingly older generations — between the city-state’s two systems. Among Hong Kong natives there appears to be a strong preference for Hong Kong’s, rather than China’s model. The Hong Kong model is based around a view of a democratic, cohesive society that rests on a Western sense of the rule of law. Beijing’s model relies on the exchange of liberty for economic stability.

Protests have been going on for weeks, but in recent days the authorities have become more heavy-handed, and in some cases graphically brutal as they try to restore order.

Investors may feel sympathy with Hong Kong’s protesters but yet ask what it has got to do with U.S. stock and bond markets. The answer is a lot.

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A downshift in consumer and economic sentiment or, even more pernicious, a full Chinese takeover of Hong Kong could catalyze a range of asset price risks. The recent closing of the airport in Hong Kong, and the disruption to commerce in the city give a taste of what may come.

First, the Hong Kong stock market is the fifth-largest in the world, heavily dependent on financial and property stocks, and a crucial gateway for Chinese companies that want to access liquid markets and international investors.

The Hang Seng Index (HK:HSI) has plunged about 9% this month, and a further selloff would be contagious via an unwind of investor positioning, the unraveling of investment products and heightened credit risk across Asia. This comes as investors generally are becoming more sensitive to emerging-market risk, as witnessed by the collapse in Argentine asset prices, notably the peso (USDARS)

Secondly, the Hong Kong property market, one of the pillars of the local economy, is one of the most precarious in the world in terms of valuation. A house-price-to-income ratio of 18 times is eyewatering in a market where the purchase of property is funded by relatively large cash deposits. Also, the property market is heavily financialized, with a number of funds and investment products tied to it. A move out of Hong Kong property by locals would see capital flow to London, Canada and possibly Australia.

Trump, Trudeau discussed developments in Hong Kong, Canadians held in China

Trump, Trudeau discussed developments in Hong Kong, Canadians held in China U.S. President Donald Trump and Canadian Prime Minister Justin Trudeau discussed the Hong Kong protests and the ongoing detention of two Canadians by the Chinese government, a statement from Trudeau's office said on Friday. © Reuters/JONATHAN ERNST U.S. President Trump meets with Canada's Prime Minister Trudeau at the White House in Washington The Hong Kong protests started as a peaceful rebuke of the government in April but have evolved into a direct challenge to Communist Party rule over this former British colony.

The third risk is the Hong Kong dollar peg (USDHKD) In recent months the Hong Kong Monetary Authority has been spending more of its large reserves in supporting the peg. A stronger dollar combined with lower local interest rates in Hong Kong has put upward pressure on the peg.

Well-established currency pegs are very hard to break, but any signs that the Hong Kong peg is pushing its lower limits in the context of a weaker local economy will at least fuel speculation about the peg. This in turn can lead to negative feedback on the local economy and property market, and by extension may also see investors worry more about the yuan. When the yuan (USDCNY) weakens, international markets go ‘risk-off’.

This is where the greater risk lies. Hong Kong is only 3% of overall Chinese GDP but it is China’s financial window to the world. Already, the Dow Jones Industrial Average (DJIA) and the S&P 500 index (SPX) briefly tumbled when Beijing allowed the yuan’s midpoint to weaken beyond the 7 yuan per U.S. dollar mark as part of its response to the trade dispute.

But a deepening of the political crisis in Hong Kong may very well drive the yuan lower and out of the control of Beijing. If that happens, investors will talk of 1997 again.

Now read Howard Gold:Here’s what U.S. stock markets do after crises similar to Hong Kong’s

Michael O’Sullivan has spent the last 20 years working in the investment management industry and is the author of “The Levelling; What’’s Next After Globalization”.

China rejects US Navy request for Hong Kong port visits amid protests.
Amid ongoing unrest in Hong Kong, Chinese officials have rejected a US request to have two US Navy ships make port visits there in the coming weeks. "The Chinese Government denied requests for port visits to Hong Kong by the USS Green Bay and USS Lake Erie, which were scheduled to arrive in the next few weeks," Cmdr. Nate Christensen, the deputy spokesman for the US Navy's Pacific Fleet, told CNN in a statement on Tuesday. The amphibious transport dock ship USS Green Bay was scheduled to visit Hong Kong on August 17 and the guided missile-cruiser USS Lake Erie was scheduled to visit next month.

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