The Real Reason behind China’s Hong Kong Crackdown

Dear Reader,

US indices were having a fine old day of it in Thursday’s trading session…until President Trump announced that he was going to make an announcement on China tomorrow (Saturday our time).

The Dow was up over 200 points at one stage. It then reversed sharply in the last hour, and finished down 150 points, or 0.6%.

As I said yesterday, the market has been blissfully ignorant on the potential for a reignition of the US-China trade war lately. The herd instinct will do that.

But it’s hard to ignore China’s increasingly belligerent stance towards Hong Kong.

You’d think, after the whole virus thing that emanated from a lab or bat soup, that China would keep its head down and play nice for a while.

But no, they’ve gone straight back into repression mode. I guess that’s just what Marxist-Leninist dictatorships do.

By the way, anyone who interprets my comments on China as racist is an idiot. I know that’s not you, loyal reader. But it’s a common refrain from the champagne socialists to play the race card, when you’re actually having a crack at an ideology.

The ideology of communism/socialism is the antitheses of freedom and liberty. Our system of democratic socialism is not without its flaws. The growth of the state and big business means a lot of corruption exists, both overt and covert.

The covert stuff, ironically, is in plain sight.

Like Hertz car rentals paying out US$16.2 million in bonuses to senior executives just before it filed for bankruptcy.

Then there’s the Fed bailing out the investor class — again.

But China’s form of government is extremely dangerous. And we need to call it out for what it is. The Chinese are a magnificent people and rightly proud of their culture and heritage. But this regime is bankrupting the country.

When that becomes apparent, it’s going to be ugly for Australia.

Up until now, the US has facilitated China’s rise. Crony capitalism guaranteed it. The Clinton administration (Bill is probably the supreme leader of corruption) OK’d China’s entry into the World Trade Organisation in 2001. He promised a huge new market for US companies.

But what happened instead?

China didn’t open its markets. It became a manufacturing centre for the world. It trashed its environment and the complicit Western multinationals moved in in force.

More recently, in 2013 the Obama administration allowed Chinese companies to list on US exchanges without adhering to the Sarbanes-Oxley Act covering accounting and risk disclosure.

There is legislation in place to unwind that now…

This is all a part of the economic war the US is waging on China. Although levelling the playing field hardly seems like war.

But this brings me back to Hong Kong…

Why is China acting now? Why not just leave it alone? After all, the current system of government has clearly been a success.

There are two explanations

One is the mainstream view of power and control. The Financial Review’s China Correspondent Michael Smith reckons China is acting now because of the upcoming elections.

But a clearer reason is the Legislative Council elections in Hong Kong scheduled for September 6.

There is a real risk that after the vote Beijing may no longer control the city’s parliament, which is currently stacked in favour of pro-China candidates. Last year’s public uprising over proposed extradition laws lit a political fire into the bellies of many Hong Kong citizens who ordinarily would not have bothered to vote.

But in my view there is an underlying reason why China needs greater control of Hong Kong. It needs to control the money flows. Hong Kong is the leaky sieve for Chinese money escaping the mainland.

As I point out in my latest research report in Crisis & Opportunity, China lost US$1 trillion in foreign exchange as capital escaped between 2014­­–16. If you believe the numbers (FX reserves have been suspiciously stable since then), China plugged the hole with stricter capital controls.

But Hong Kong’s financial centre is an obvious conduit for the Chinese to get their wealth out of the mainland.

The problem for China is that it has yuan denominated credit equivalent to US$40 trillion sloshing around its economy. With FX reserves of US$3 trillion, it wouldn’t take much in the way of capital flight to put pressure on those reserves. That would in turn hurt the money supply, and China’s economy would plunge into recession.

Capital is like people. It wants freedom of movement. It doesn’t take well to being caged up. But to maintain power, a communist dictatorship must cage its people and its capital. That’s what the move on Hong Kong is all about.

Tomorrow, you’ll see the US response. Trump has scheduled a press conference to talk on the issue. With the big bounce in the stock market, Trump can afford to go hard at China again, blame them for the weakness and create a (legitimate) foe for his election campaign.

The market rally may be done for now.

Or not.

It just depends which narrative gains the upper hand — China bust or vaccine cure.

On the vaccine front, hopeful Novavax this week announced the $167 million purchase of a manufacturing plant with the capacity to make one billion doses of antigen starting in 2021.

Pretty confident for a company without a drug on the market, and still in the early stages of its trials.

But as I discussed with Ryan Dinse recently (see yesterday’s Rum Rebellion for part one of the interview) the path from discovery to implementation is potentially much quicker these days.

Read on for another essay from Ryan on this important topic, plus part two of our interview…


Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

Learn more about Greg Canavan's Investment Advisory Service.

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