A new low in United States-China relations is shifting investors’ focus from a simmering trade conflict to the risk of a potential financial war if Hong Kong’s status as a global financial hub is targeted.
On the surface, it seems that Singapore could stand to gain if business confidence in Hong Kong is diminished.
But there is no trade-off in a catastrophic war of financial sanctions between the world’s two largest economies. In balance, everyone including the two warring camps – and especially open and trade-driven economies like Singapore – will suffer direct or collateral damage.
Some of the draconian measures US President Donald Trump can choose to penalise China on imposing a national security law include sanctions, such as the freezing of assets of individuals deemed responsible for undermining the freedoms and autonomy of Hong Kong.
The sanctions, under the Hong Kong Human Rights and Democracy Act passed last year, may extend to the businesses and other entities these people are linked to and the banks that deal with them.
For banks, the penalties can be extended to effectively cut them off from the US financial system, with measures such as blocking foreign currency transactions and dealings with American lenders or citizens.
Any action on this front could potentially diminish Hong Kong’s role as an international finance centre.
China has promised to retaliate. Tit-for-tat sanctions may not only doom the truce on the trade war, but also open new fronts on the global financial system, with the world’s two largest economies targeting each other’s capital and financial markets.
A financial war can also be sparked if Mr Trump goes ahead with his threat to delist or curb listing of Chinese companies on Wall Street.
While seen as highly unlikely, the 2019 law, which is an amended form of the 1992 Hong Kong Policy Act, allows the president to kill the Hong Kong dollar peg with one executive order.
He can bar the Hong Kong dollar’s free convertibility into US dollars and block Chinese or Hong Kong banks from the greenback clearing system.
Killing the Hong Kong peg will be disastrous for not just Hong Kong and China, but also the entire global financial system and the players involved in it, including US banks and financial institutions that will probably need to exit the territory to avoid any penalties.
A full-blown US-China financial war will also spill over to the world economy at a time when it has started to flag tentative signs of recovery from the biggest economic growth contraction since the Great Depression.
“Unfortunately, the relationship between the two superpowers is increasingly in the realm of a zero-sum rivalry for dominance as opposed to healthy, win-win competition,” said DBS Bank chief economist Taimur Baig in a recent research report.
“A ruinous cold war that hurts global trade, supply chains, efficiency of common standards, geopolitical stability is increasingly on the cards, in our view,” he added.
Measures such as import tariffs and export controls will be relatively benign, as Hong Kong is mainly a trans-shipment (re-export) hub with direct exports to the US accounting for only 1.2 per cent of its total exports last year.
Still, the indirect impact of revoking Hong Kong’s special status as a separate Customs territory on market sentiment is harder to gauge.
A panicked business community could trigger cascading outflows, crashing its markets and causing runs on its banks.
The US$4.9 trillion (S$6.9 trillion) stock market, the world’s fourth-largest, is now at its most volatile since 2012, according to a measure of historical 100-day swings on the Hang Seng Index.
JP Morgan believes there is a material risk that the US will withdraw Hong Kong’s special status as a separate Customs territory in its annual review after Secretary of State Mike Pompeo decertified the territory’s autonomy.
The US may also tighten controls on exports of sensitive or emerging technology to Hong Kong, and extend actions to other important areas, such as the capital market and the financial system, said the US investment bank, which expects the territory’s economy to contract by 6.4 per cent this year following a 1.2 per cent decline last year.
“The re-emergence of social unrest and geopolitical risk will add uncertainty to Hong Kong’s bleak economic outlook,” said JP Morgan.
Ms Tara Joseph, president of the American Chamber of Commerce in Hong Kong, told Bloomberg Television on Monday that the chamber does not see “a rush for the exits at all”.
“What we’re seeing generally is everyone first digesting the news. And second of all, looking at their footprint in Hong Kong and thinking through whether that ought to change,” she said.
More than 1,300 American companies have operations in Hong Kong, with US foreign direct investment totalling US$82.5 billion in 2018. The US enjoyed a US$23 billion trade surplus with Hong Kong, the biggest in the world.
That is not very different to what Hong Kong and China mean for Singapore.
Hong Kong is Singapore’s fifth-largest trading partner and the fourth top investment destination. Nearly 500 Singapore companies have offices in the territory, including regional headquarters.
China is one of Singapore’s top trading partners.
Still some figures do back the view that multinational companies (MNCs) in China and Hong Kong are looking for safer destinations for their presence in Asia.
Singapore’s manufacturing and service sectors received $12.4 billion fixed asset investment commitments in the first quarter this year, data in the Economic Survey report showed.
The investment represents $2.2 billion committed by local investors and $10.2 billion by foreign companies. Foreign investment commitments were led by companies from the US at $8.6 billion, higher than the $5.7 billion in the whole of last year.
Ms Selena Ling, head of treasury research and strategy at OCBC Bank, said that while Singapore has always been an attractive investment destination, the US-China trade war as well as the unrest in Hong Kong may have also contributed to a rethink of the North Asian strategy by many MNCs.
“The onset of the US-China trade war may have prompted many MNCs to shift to a ‘China plus one’ approach to diversify their production strategy,” Ms Ling said.
Foreign currency deposits in Singapore-based banks have also shot up by nearly $10 billion in the first four months of the year – an indicator people usually monitor whenever an Asian economy is in distress.
Singapore has also topped Hong Kong on the Global Financial Centres Index, taking the fifth spot.
Yet, all these gains will eventually have to be measured against the potential blow Singaporean investors and traders will face if Hong Kong’s situation further deteriorates.
The global business community in general is hoping that better sense will prevail over fiery political rhetoric, and the US authorities can find ways to limit the damage to the people of Hong Kong and its economy.