Morning Commentary: Hong Kong: Still Special Even Without the Special Status

Foreign Exchange - Morning Commentary
Hong Kong: Still Special Even Without the Special Status
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Earlier this week, President Trump issued an order to end Hong Kong’s special status with the United States.  So what exactly was Hong Kong’s special status? 

The 1992 United States-Hong Kong Policy Act covers a wide array of special treatments given to Hong Kong by the US.  The act recognized Hong Kong as a “separate territory in economic and trade matters” and treated Hong Kong differently than mainland China on visa applications and access to sensitive US technology among other things.  The Act also explicitly mentions allowing the USD to be freely exchanged with the Hong Kong dollar.  In essence, the law was designed to preserve Hong Kong’s privileges as a separate entity from mainland China after the 1997 handover.  

Despite the headlines, removal of these special treatments are likely more damaging to sentiment than to the real economy.  The elimination of this special treatment means the Hong Kong exports will be subject to the same punitive tariffs imposed on Chinese exports.  However, exports to the US accounts for just 0.1% of Hong Kong’s total exports.  

Regarding US regulation on exports, re-exports, and services for national strategic and security reasons, the change in status could fundamentally change trading practices for some companies.  But this doesn’t mean that Hong Kong will cease to be an international trading hub.  This status was based on many factors including Hong Kong’s world class airport and container facility, strong financial and professional support, and deep integration with regional supply chains.  

Because of all this, it is unlike that Hong Kong becomes just another city in China.  The special treatment from the US doesn’t cover all of Hong Kong’s external ties.  Clearly, the US is a highly influential country, and there will be reputational damage.  Yet the deterioration of one bilateral relationship won’t completely undermine Hong Kong’s unique competitive advantages as these other advantages won’t suddenly disappear.  Further, Hong Kong remains the largest offshore Renminbi center.  This means Hong Kong’s status as an international financial center will get a boost once Beijing renews its Renminbi globalization efforts.
  • The ECB kept rates unchanged as expected.  The bank also reaffirmed the size of its PEPP program and signaled that it stands ready to adjust all instruments as needed.  
  • US initial jobless claims came in at 1.3 million, missing estimates for 1.25 million claims and slowing the pace at which it has been dropping.  Continuing claims remain very high at 17.3 million but continue to trend in the right direction.  Retail sales rose 7.5% MoM, building on last month’s strong gain. 
  • China’s GDP grew 3.2% YoY, making it the first major economy to reach expansion since the coronavirus pandemic.  On a QoQ basis, China’s second quarter grew 11.5% versus the first three months of the year.  However, it should be noted that consumer spending was weaker than expected.  Like other economies, the question now become whether or not momentum from the initial bounce can be sustained.  
  • The UK reported a positive jobs number with the unemployment rate staying steady at 3.9% despite expectations for it to rise to 4.2%.  Average weekly earnings also fell less than expected. 
  • Australia’s June employment report came in better than expected with the country adding 210.8K jobs against expectations for 100K additional jobs.  Unfortunately, the breakdown in jobs shows that employers are still not confident in the economy.  Part-time jobs rose nearly 250K while full-time jobs continue to contract.  The unemployment rate did tick up slightly to 7.4% from 7.1%, but this mainly reflects an increase in the participation rate.  It should also be noted that 420K people were counted as employed even though they worked zero hours as they were supported by the government’s JobKeeper support program.  The JobKeeper program is set to expire in September but could be extended at the government’s mid-year Fiscal update on July 23.  
  • OPEC+ announced that it would rollback part of its production cuts next month as expected. 
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