SinoInsight 1
On Nov. 27, United States President Donald Trump signed the “Hong Kong Human Rights and Democracy Act of 2019” (henceforth referred to as the “Hong Kong Act”) into law. The Hong Kong Act requires the U.S. Secretary of State to certify annually that Hong Kong is sufficiently autonomous enough from Beijing to keep its favored trading status with the United States. The Act also allows the U.S. to impose sanctions and travel restrictions on individuals (Hong Kong and Chinese officials, etc.) who carry out human rights violations in Hong Kong.
Trump issued two statements on the signing of the Hong Kong Act. According to the first statement, “Certain provisions of the Act would interfere with the exercise of the President’s constitutional authority to state the foreign policy of the United States. My Administration will treat each of the provisions of the Act consistently with the President’s constitutional authorities with respect to foreign relations.”
In the second statement, Trump wrote: “I signed these bills out of respect for President Xi, China, and the people of Hong Kong. They are being enacted in the hope that Leaders and Representatives of China and Hong Kong will be able to amicably settle their differences leading to long term peace and prosperity for all.”
The Hong Kong government released a statement expressing “strong opposition” to the Hong Kong Act. The statement claims that the Hong Kong Act and another recently passed U.S. act on Hong Kong “clearly intervene in Hong Kong’s internal affairs,” are “unnecessary and unwarranted,” and “would harm the relations and common interests between Hong Kong and the U.S.”
The PRC foreign ministry warned that the U.S. would shoulder the consequences of China’s “countermeasures” if it continued to act “arbitrarily” with regards to Hong Kong. The foreign ministry did not elaborate on what the “countermeasures” would be. PRC vice foreign minister Le Yucheng also summoned U.S. Ambassador to China Terry Branstad on Nov. 28 to demand that Washington immediately cease interfering in the PRC’s domestic affairs and stop damaging ties further.
OUR TAKE
1. In the Nov. 21 edition of this newsletter, we noted that President Trump has “few reasons (or excuses) to not sign the Hong Kong Act into law.” His signing of the act into law affirms our analysis.
2. We also wrote in Nov. 21 edition of this newsletter, “To avoid antagonizing China and jeopardizing the prospect of reaching a ‘phase one’ Sino-U.S. trade deal, Trump could conceivably refrain from using the Hong Kong Act too readily after it is passed.”
We believe that Trump has given himself room to “refrain from using the Hong Kong Act too readily” by stating that “certain provisions of the Act” would “interfere” with the implementation of foreign policy. However, if the U.S. and China cannot reach a “phase one” trade deal, or China is unable to deliver its commitments after a deal is signed, Trump could easily turn the Hong Kong Act from a “virtue signaling” legislation into a “formidable weapon” to wield against the CCP.
3. The CCP’s response to the passing of the Hong Kong Act has thus far been more bark than bite. We believe that the CCP will not harp too much on the Hong Kong Act in its propaganda because it does not want the Chinese people to figure out what the Act is all about. Concurrently, the CCP will become more cautious in its handling of Hong Kong to avoid antagonizing the U.S. and actually forcing the Trump administration into exercising provisions in the Hong Kong Act, such as sanctioning Hong Kong and Chinese officials or re-evaluating Hong Kong’s autonomous status.
It should be noted that caution on the part of the CCP/Hong Kong government/Hong Kong police force does not mean that they will refrain from using violence and hardline measures just because the Hong Kong Act has been passed. The CCP, however, could make put more effort into covering up the darker aspects of suppression in Hong Kong.
4. As the factional struggle in the CCP escalates, Xi Jinping’s political rivals could find ways to stir more chaos in Hong Kong and force the Xi leadership to use more hardline measures to quell the protests in the city. An escalation of violence in Hong Kong would place pressure on the Trump administration to use the Hong Kong Act. And if the Act is used, the Xi leadership will come under fire in the CCP regime for mishandling the Hong Kong situation, raising Xi Jinping’s already very high personal political risk levels.
5. We wrote in our China 2019 outlook that “The U.S. could reassess Hong Kong’s status as a free port, and even consider reclassifying Hong Kong as part of the same customs territory as mainland China.”
We expect the situation in Hong Kong to deteriorate further, not improve. Given how Trump has tied the trade deal with Hong Kong, a worsening of things in Hong Kong will ultimately affect the Sino-U.S. trade agreement and the broader bilateral relationship. And when the Sino-U.S. relationship takes a turn for the worse, it cannot be ruled out that the U.S. reassesses Hong Kong’s status as a free port under the Hong Kong Act.
SinoInsight 2
Guo Shuqing, the chairman of the China Banking and Insurance Regulatory Commission and Party Secretary of the People’s Bank of China, went on an inspection tour to Jiangxi on Nov. 14, according to a Nov. 26 report on the CBIRC’s official website. During his inspection tour, Guo convened a conference on the theme “deepening financial reform and serving the development of the real economy” at the PBoC’s Nanchang Zhongzhi branch. The conference was attended by senior financial officials in the Jiangxi provincial government, the PBoC’s Nanchang Zhongzhi branch, the Jiangxi CBIRC, and other local financial institutions.
At the conference, Guo Shuqing said that the financial system must the Party central’s policies and guard against financial risks. Guo called on the financial officials to:
1. Meticulously deal with illegal financial institutions and groups.
2. Eliminate shadow banking risks in an orderly manner and significantly reduce the scale of cross-financial services.
3. Crackdown on illegal financial activities, including illegal fund-raising and the illegal absorption of deposits; internet risks should also be rectified.
4. Increase efforts to expose and dispose of non-performing loans, and guard against traditional credit risks.
5. Stabilize the leverage ratio and focus on reducing debt ratio levels of state-owned enterprises.
6. Eliminate the hidden debt risks of local governments.
7. Suppress the financialization of the property sector and the forming of bubbles; stabilize housing prices, land prices, and buyer expectations.
8. Reform small- and medium-sized banks to guard against risks; use multiple channels to replenish bank capital.
9. Respond to external shocks in a stable manner and safeguard the stability of the renminbi.
Also on Nov. 26, the PBoC released the 2019 China Financial Stability Report. The report warns that accumulated debt of Chinese households is rising rapidly, accounting for 60 percent of China’s GDP at the end of 2018. The figure is double that of 2012’s figure, and greater than half of the accumulated debt of countries in the European Union.
The report also showed that 586 banking institutions in China were rated as high-risk institutions (risk levels between 8 to 10) in the fourth quarter of 2018. Of the 586 institutions, one was a bank that received a “D” grading and was classified as an institution that could be “shut down, taken over, or abolished.” The 586 “high-risk” banking institutions made up 13 percent of the 4,379 banking institutions on the mainland, and were mainly small- and medium-sized institutions in rural areas.
OUR TAKE
1. Any one of Guo Shuqing’s nine points listed above could trigger systemic risks in China’s financial system. His remarks affirm our repeated warnings and analysis of severe financial risks in China.
2. China’s financial risks are compounded and indirectly confirmed by corruption. According to incomplete statistics from the website of the Central Commission for Discipline Inspection and the National Supervisory Commission, at least 13 officials in the banking sector were purged so far this year.
On Nov. 18, the Jilin provincial discipline inspection commission announced that Zhang Baoxiang, the former Party Secretary and chairman of Jilin Bank, had been investigated. Earlier, mainland media outlets had reported many corruption-related scandals involving Jilin Bank, including the case of Dalian branch of Jilin Bank and 580 million yuan of fraudulent loans. As of Dec. 18, 2018, the Dalian branch of Jilin Bank had lost at least 654 million yuan in principal and loans on the fraudulent loans.
On Nov. 1, 2013, Tian Xueren, the former Party Secretary and chairman of Jilin Bank, was sentenced to life imprisonment for accepting bribes.
On Dec. 14, 2018, Wang Anhua, a former Party committee member and deputy governor of Jilin Bank, was investigated on corruption charges.
3. Several external factors are going against the CCP’s favor, including worsening Sino-U.S. relations, the recent Chinese spy defection incident, and the release of damning information about the CCP’s persecution of Uyghur Muslims in Xinjiang.
We believe that the situation in Hong Kong could worsen further and push the CCP elite in Hong Kong to move their money and assets out of the city. Accelerated capital flight would impact Hong Kong’s stock market and property sector, with ramifications for mainland China.
Businesses and investors must closely track the political situation in China, which could inspire large fluctuations in the financial markets.
