Hong Kong Headed for Crisis Again

Hong Kong Headed for Crisis Again

Today we were going to talk about iron ore. I was going to share my thoughts on how we rely on selling it and suddenly our biggest buyer is threatening to go elsewhere for the stuff.

I was going to tell you, it’s not what it seems.

But those thoughts will need to wait another day or two.

Because today you’ll be hearing from Jim.

Last week the Chinese Communist Party (CCP) stepped up its rhetoric towards Hong Kong. Proposed legislation on the mainland threatens the freedom of Hong Kongers.

The promise of ‘one country, two systems’ appears as if it’s about to end abruptly.

Investors should pay attention to what happens in Hong Kong.

Hong Kong is a financial hub and a democratic society. As both Jim and I have written in the past, how the CCP respond to Hong Kong matters for Australians.

The CCP isn’t just waggling their finger about iron ore, or barley, or the global push to have the roots of the coronavirus investigated.

Their very dominance is being questioned. Not just by outsiders…but by locals.

The Chinese government will only last if they deliver on two things: continued economic growth and prosperity for their people, and nationalism.

Right now, they’ve ditched growth. Even the predicted gross domestic forecast for the year is gone.

That only leaves nationalism…and their tough talk is filling our headlines as we speak.

The question Jim asks today is, just how far will this talk go before it morphs into a tragic event?

Read on for more.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia


Hong Kong Headed for Crisis Again

Shae Russell

Jim
Rickards

I’ve been visiting Hong Kong for over 35 years. My first visit was in 1982 and my most recent was in May 2018.

All large cities change over time. New districts are developed. New buildings are erected, and some old ones torn down.

Cities on the water, like Hong Kong, can use landfills to build more land and transform colourful (if dangerous) dockside alleys into sleek convention centres and hotel districts. None of that is unexpected, especially in dynamic cities like Hong Kong.

Yet in addition to physical infrastructure (which changes), cities have a kind of soul or zeitgeist, which is less susceptible to change.

St Mark’s Square in Venice, the Louvre in Paris, and the Houses of Parliament in London are all defining and, if not eternal, at least help to keep a place rooted over time.

My visits to Hong Kong in the late 1990s and early 2000s were characterised by the same energy and dynamism I had encountered decades earlier.

I had routinely described Hong Kong to friends as the most energetic city in the world after New York.

The ‘one country, two systems’ seemed to work well together.

Be careful what you say

Yet as China’s growth ‘miracle’ gathered steam from 2002–07, a legal heavy hand and gloomy administrative culture directed from Beijing descended on Hong Kong. You could feel it in the air.

At first, I noticed the lack of energy. The city was still rich and active, but there was a ‘business as usual’ attitude that was less driven than the energetic venue I had always known. Then I noticed a more depressed attitude among the bankers, investors, and event planners I associated with.

They still made money, but the typical upbeat smile had been replaced with a more worried look.

This was accompanied by a rise in street protests against the heavy hand of Beijing on matters such as free speech, government autonomy, and the relative importance of Hong Kong in the Chinese master plan.

Clearly, Shanghai had come into its own as the financial centre of China, so Hong Kong’s special role had been greatly diminished. The starkest evidence of change came during my last visit in May 2018…

I was presenting to a group of elite policymakers and property developers at the prestigious Asia Society local headquarters. At one point, one of the local elites took me aside, looked over his shoulder and at a near whisper said, ‘Be careful what you say.

Global investors are accustomed to treating Hong Kong as a bastion of free markets and fair dealing.

Those assumptions were suddenly no longer true, as Beijing began to treat Hong Kong as just another piece on a chessboard of market manipulation and geopolitical ambition.

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Hong Kong lumped with Beijing’s control

The Chinese authoritarianism evident in Hong Kong last year only cemented that policy shift.

What developments can we expect now that the freewheeling Hong Kong we knew from 1960–2005 has come to an end?

Last year’s unrest in Hong Kong was another symptom of the weakening grip of the Chinese Communist Party on civil society. The unrest spread from street demonstrations to a general strike and shutdown of the transportation system, including the cancellations of hundreds of flights.

This social unrest died down after the proposed bill to extradite Hong Kong citizens to China was pulled off the table. But now Beijing is clamping down hard with its proposed legislation to punish dissent.

Expect the pro-democracy protests to resume again. They may even grow larger. How will China react?

A direct Chinese invasion cannot be ruled out if local authorities cannot squash the unrest.

Of course, that would be the last nail in the coffin of the academic view of China as a good global citizen.

That view was always false, but now even the academics have started to understand what’s really going on.

The situation in Hong Kong today is eerily reminiscent of the days leading up to the Tiananmen Square massacre on 4 June 1989…

In both cases, a particular cause for complaint gave rise to demonstrations, which soon grew and led to wider demands for political liberty and justice. Tiananmen started as a demonstration against inflation, which drew college students and housewives.

At its height, over one million protestors were active in Beijing, while demonstrations sympathising with the Tiananmen protestors appeared in over 400 Chinese cities.

Tiananmen Square is immediately adjacent to the Forbidden City and the Chinese leadership compound, so the demonstrators posed a potential threat to the government itself. Finally, hard-line Communist Party leaders ordered tanks and troops to attack the demonstrators.

No one knows the exact number killed, but estimates range from the low thousands to the tens of thousands. The entire incident has been covered up and is never mentioned in official communications or taught in Chinese schools…

Another Tiananmen Square coming

Last year’s Hong Kong demonstrations began on a small scale to protest a proposed law that would allow extradition of Hong Kong people to Beijing for trial on charges that arose in Hong Kong.

That would have deprived Hong Kong people of legal protections in local law and could have subjected prisoners to torture and summary execution. The demonstrations grew exponentially and involved hundreds of thousands of protestors.

The list of demands also grew to include more democracy and freedom, and adherence to Hong Kong’s rule of law. Now the protests look like they’re starting again, and rightly so. Here’s China’s dilemma…

If Beijing tolerates more protests (and they succeed), they may lead to greater autonomy for Hong Kong at a time when Beijing is trying to strengthen and centralise its control.

But if Beijing cracks down on the protestors, it will have another Tiananmen Square massacre on its hands with two important differences.

Hong Kong is a major city and will not be as easy to control as a confined square in Beijing.

And the rise of social media, mobile devices, and live streaming guarantee that Beijing will not be able to hide or cover up any atrocities.

The jury is out on which path the Communists would take. But with China’s increasing belligerence in the region, don’t count out a strong response.

Unfortunately, the resolution may not be the peaceful one hoped for but another bloody massacre.

With the US warning China against strong action in Hong Kong, let’s just hope the situation doesn’t light a powder keg resulting in a shooting war.

In case investors didn’t have enough to worry about with the coronavirus, they may have a whole lot more to deal with before too long.

All the best,

Jim Rickards Signature

Jim Rickards,
Strategist, The Daily Reckoning Australia

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