No End in Sight For Hong Kong Protests, as US Officials Meet HK Counterparts

Sam Reynolds

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

Hong Kong's summer of discontent is shifting into a fall of fury as protests in the semi-autonomous region of China show no sign of slowing down. In a bid to put pressure on Beijing and Hong Kong's government to sit down and negotiate with the protestors, recently a delegation of Hong Kong lawmakers met with their US counterparts for an under-the-radar meeting.

The delegation met with Senator Steve Daines,  Rep. Greg Gianforte, Rep. Hank Johnson, and Rep. Thomas Suozzi to discuss the Hong Kong Human Rights and Democracy Act which, if made into law, would enact punitive measures against officials in China -- as well as Hong Kong lawmakers -- that threaten Hong Kong's autonomy.

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US President Donald Trump has called on Chinese President Xi Jinping to meet with the protestors to try and resolve the crisis, though it's unlikely such a meeting will ever happen.

Why are Hong Kongers Protesting?

The Hong Kong protests began in June over a proposed extradition law that would provide the legal framework for residents of the autonomous city to be sent to China.

Opposition to this law was unique insofar that it had a broad spectrum of support from both the political left and right within the City: while students have been the loudest voices on the streets the American Chamber of Commerce, which represents US corporate interests, expressed concern over the ambiguity of the law, as have many financial institutions and legal firms.

Business in Hong Kong is concerned about the bill because they feel like it's an encroachment of the Western-style 'Basic Law', with rights, liberties, and guarantees similar to any Western country,  that's governed the territory since the handover in 1997. With this comes the rule of law — a transparent, predictable system that promises neutral venues to arbitrate disputes. For these industries, this extradition bill is going to serve as a sort of Panopticon to govern behavior. As an example: analysts will need to think twice about writing reports critical of strategic state-owned Chinese companies; the hedge fund industry thrives on evidence-backed reports pointing out companies’ flaws.

According to a recent report by Reuters, Beijing has rejected HK leader Carrie Lam’s proposal to withdraw the extradition bill and ordered her not to yield to any of the protesters’ other demands

What Can the US Do?

The US has one powerful tool it can use to force a resolution between Beijing and Hong Kong: the Hong Kong Policy Act. Passed in 1992, the Act defines Hong Kong as a separate entity, from China. This gives Hong Kong preferential access to the US market -- a key requirement for the health of Hong Kong's shipping industry which would become less competitive when compared to Singapore should this happen. In addition, the Act also recognizes Hong Kong passports as separate documents from those from mainland China. Any change to the law might weaken the power of these passports in the eyes of the US.

Thus this is a very powerful weapon. Currently, a bi-partisan bill is on the floor of the US Congress that would introduce re-examine the Hong Kong Policy Act should the situation not improve.

What's the Impact on the Tech Industry?

Just north of Hong Kong, up the Pearl River Delta, is Shenzhen, often dubbed "the factory of the World."

But between Shenzhen and Hong Kong is a border with two different customs jurisdictions on either side. This allows goods to be imported into the US at a much lower tax rate, as Hong Kong, even before the Trade War, had preferential access to the US market over China. Because of something called the "first sale rule" exporters sending merchandise to the U.S. through multiple locations will be charged duties based on the price of the initial transaction.

Because of this rule, Hong Kong's port is an essential step in the global supply chain between Shenzhen and the US. Singapore is also a free port, and could be used as well, but geographically it's much further away from Shenzhen than Hong Kong: Hong Kong can be reached in a few hours from Shenzhen, Singapore a few days.

So if Beijing and Hong Kong crackdown on the protests with an iron first, forcing the US to withdraw the Hong Kong Act, expect the prices of electronics sourced from China to increase dramatically.

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