Enter the Chinese Dragon
From Nixon - Mao detente to Trump - Xi hostility
President Nixon was the first American president to visit China. He visited China along with his right-hand man Henry Kissinger and shook hands with Chairman Mao Zedong on Feb 21, 1972. It was an epochal moment in the history of international relations.
Until that point, nearly a billion Chinese believed that the US was their staunchest foe. After almost 22 years of abject isolation, that meeting paved the way for China to emerge from poverty and integrate with the global community. The subsequent rise of China propelled global growth tremendously and gave hope for a billion people to climb the ladder of economic prosperity. In just over 45 years, China became the second largest economy in the world.
The West, especially the US, believed that cooperation in trade, industry, technology, and culture will lead to all of us living in a harmonious global village harnessing the strengths of all other partners and fostering healthy competition. But China had other ideas. For decades, China continued to function without most of the checks and balances common in the West.
As years passed by, clashes started to rise in terms of business practices and ethical values. No American President addressed this issue as much as President Trump. China has their own agenda on economic, political, and military affairs. While they embraced the benefits of capitalism, the Chinese Communist Party started to consolidate and exercise more power domestically and internationally.
With their newfound wealth, they cornered many African countries and other countries bordering their strongest rival India to part with their commodity resources and other strategic assets. They bought stakes in major European and American corporations and acquired prime real estate in developed countries.
All this was going barely noticed until China started facing a chorus of blame for its (lack of) handling of the coronavirus and sowing the seeds for the pandemic-induced global depression.
Not to be undone, at the height of all, this China has decided to take control of the privileges Hong Kong has as a “Special Administrative Region” (SAR). The new legislation will give the CCP (Chinese Communist Party) the ability to ban treason, secession, sedition, subversion, and bypass Hong Kong lawmakers all together. HK follows the rule of law and has an independent judiciary.
This completely violates the agreement that China made with the UK when the island ceased to be a British colony in 1997 and agreed to become a semi-autonomous region of China.
Under the agreement, after 156 years of British rule, HK would be allowed to maintain the capitalist system and its way of life for 50 years after which it would fully become a part of China. The arrangement was called “One Country, Two Systems”. Overnight, China has decided to bring this forward by 17 years.
In 1997, Hong Kong accounted for more than 20% of the Chinese economy but now it is only 3%. China has another 10 bigger cities that exceeds the size of HK‘s 7.5 million people. But HK will still be a critical gateway to China and the CCP should tread carefully. HK stock market will still remain as the window for the mainland Chinese to raise foreign capital.
So, what could have prompted China to take this action?
I think the CCP wanted to show who’s the boss. They probably have a threefold agenda.
They wanted to overtly challenge the international community on matters where they can exercise unilateral power even if it violates previous agreements.
They want to deliver an unequivocal message to Taiwan on what the future holds for them.
If there arise any dissent in any parts of mainland China, the high handedness and the iron fist of the CCP will be made felt.
Surely, the international community will take notice of this and will get more convinced that it will be difficult to do business with China if they don’t play ball.
Meanwhile in the US, President Trump and presidential candidate Joe Biden will be busy trying to convince their voters, one upping the other, that they are better suited to put China in its place.
In the present situation of the global economy, these tensions should weigh very heavily on the markets unless there is a quick, sensible and palatable resolution.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.