Thought May 25, 2020 / 10:43 am UTC

The U.S. and China Flex Muscles on Hong Kong

By Mike Gallagher

U.S. President Donald Trump's attempt to deflect blame onto China for COVID-19 is escalating U.S./China tensions. If the U.S. pushes for the withdrawal of Hong Kong's special status as a financial hub, then it would bring tensions to a new level.

Trump blaming China is a classic deflection tactic from the president, with WHO, former President Barack Obama and state governors also in the firing line. However, China hawks in the U.S. are using this rhetoric to take measures on China. 

Friday saw 33 Chinese companies added to the blacklist over spying and concerns over the treatment of Uighur Muslims, while the Senate is pushing a bill to delist Chinese companies. So far, these could be regarded as skirmishes between the U.S. and China, but Hong Kong could become an escalation point. China's new national security law would reduce Hong Kong's special status within China, but the U.S. is threatening action if China implements this law. One option is for the U.S. to revoke Hong Kong's special economic status with the U.S., which would result in tariffs against Hong Kong and likely undermine certain key sectors in Hong Kong (e.g., financial services). Such an escalation would prompt some temporary worries in Asian financial markets about a U.S./China cold war. 

The restraint on the China hawks could be Trump focusing on winning the presidential election in November, where the top issues include the economy and healthcare more than China. The president's current focus on getting religious gatherings restarted and restricting postal voting is all part of the wider plan. Being verbally tough on China but not taking action suits Trump—he still wants to talk about his Phase 1 trade deal later in the election campaign. Regarding Hong Kong, the first option could be action against certain Chinese officials, rather than withdrawing Hong Kong's special status. 

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I, Mike Gallagher, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.