SinoInsight 1
South Korean president Moon Jae In confirmed on April 19 that North Korea’s Kim Jong Un wouldn’t demand a withdrawal of American troops from South Korea in denuclearization negotiations. He added that the North Koreans “only talk about an end to hostilities against their country and about getting security guarantees.” Last month, Kim told South Korean special envoys that North Korea wouldn’t need nuclear weapons if the regime didn’t feel “threatened military” and has given “security guarantees.”
At a news conference with Japanese prime minister Shinzo Abe on April 18, President Donald Trump publicly thanked China’s Xi Jinping for having “done more for us than he’s done for any other administrations, or than any leader of China has done for any president or administration.”
OUR TAKE
We wrote last year that Trump is treating Xi well as part of U.S. strategy. A year after the Trump-Xi summit in Florida, it is becoming clearer that their relationship has led to a breakthrough on the North Korean issue. Indeed, Kim is coming to the table for denuclearization and peace talks not due to better Sino-North Korea relations, but due to the improvement in Sino-U.S. relations. No wonder Xi Jinping was the person who Trump praised the most on Twitter (12 tweets) over the past year.
Several experts and analysts say that Trump is walking into a trap by agreeing to meet Kim. Indeed, North Korea, like the boy who cried wolf, has tricked past U.S. administrations on its commitment to denuclearization.
The present situation, however, is markedly different from the past. First, Trump has made clear his stance on North Korea and would not compromise his position for anything less than complete denuclearization. Meanwhile, Xi has the authority and incentive to cooperate and compel Kim to accede to U.S. demands. Xi’s friendship with Trump can only buy him so much time before the trade war hits, and China cannot withstand a trade war with America. (Already, China’s 5G ambitions have taken a massive step back with the ZTE ban and FCC restrictions to both ZTE and Huawei.) If denuclearization and peace talks pan out favorably, the U.S. may consider de-escalating the trade war. As for Kim, his nuclear plan was always to ensure regime survival. With sufficient “security guarantees” from the U.S., Kim should hand over his nuclear weapons and secure his regime by following the CCP’s model of reform and opening up.
GET SMART
Changes in the Korean Peninsula are linked with the CCP factional struggle between Xi Jinping and his political rivals. In other words, analysis of the North Korean situation that doesn’t account for the major shift in elite CCP politics is missing a big part of the overall picture.
SinoInsight 2
Since promising to intervene to prevent the Hong Kong dollar from falling below the lower limit of its trading band on April 12, the Hong Kong Monetary Authority (HKMA) has already entered the market 13 times in eight days and bought HK$51.3 billion ($6.5 billion) of local dollars.
OUR TAKE
1. In recent years, mainland capital entering Hong Kong and the city’s wealthy migrating away (and taking their capital with them) has caused the Hong Kong dollar to depreciate. Meanwhile, HIBOR-LIBOR spreads are now at 1 percent, leaving speculators room to short the Hong Kong dollar. The HKMA cannot purchase local dollars indefinitely, or Hong Kong’s foreign reserves would be depleted. And if the foreign reserves are exhausted, the HKMA could be forced to delink the HK dollar from the U.S. dollar and allow it to depreciate.
Unlike in 1997, Beijing cannot provide foreign exchange guarantees to Hong Kong because it faces balance of payments issues.
2. Central bank chief Yi Gang said at the Boao Forum that mainland-Hong Kong Stock Connect daily quota would be raised by four times. This could be Beijing’s move to support Hong Kong stocks, but it might not be effective. Recently, capital has been fleeing the Hong Kong stock market for the Shanghai and Shenzhen markets.
3. Hong Kong dollar interest rates may be raised after May 1. Because Hong Kong is China’s financial gateway, a rise in interest rates and drop in asset prices would impact the mainland property markets and stock markets. The mainland could see a debt crisis if the Hong Kong situation gets out of hand.
The interconnectedness between China and Hong Kong can be seen in HNA Group buying land in Hong Kong at a premium in recent years.
