Believe in Hong Kong, but watch the sky

Is it really so utterly unthinkable that Hong Kong could ever be more than an ideological battleground between the United States and China? Long-time residents such as Bloomberg’s Matthew Brooker think so. Traders who have been driving Hong Kong Exchanges and Clearing (0388.hk) higher this week think so. The American Chamber of Commerce in Hong Kong is not quite sure, but would like to think so.

Why? Because the two countries have too much skin in the game? Is that really the best explanation that can be offered for why financial decoupling is unlikely? If so, it is weak thinking at best, complicit at worst.

The traders are easiest to forgive for not exercising their imaginations. Nevermind that HKEX is a tougher club to join than the Nasdaq for many reasons, as pointed out by the SCMP’s Enoch Yiu. These investors clearly believe a gaggle of Chinese tech IPOs are winging their way to Hong Kong, free of cyber-reviews, and that the mass migration of listed Chinese firms from New York is also imminent.

They are just following the best advice money can buy, of course. As an FT report notes, investment bankers are desperately trying to salvage lucrative IPO fees by repackaging their New York hopefuls for Hong Kong. This is despite the odds of success, as one source said: “If you want to do a deal this year, at best you’ll be delayed until 2022 and at worst you won’t be able to do it.”

Nevertheless, they deserve sympathy. None of these people could reasonably be expected to wonder whether HKEX might now be seen by American national-security hawks the same way a target moving into the open draws a bead from a Predator 30,000 feet above.

When the strike comes, however, they cannot claim they didn’t see a glint in the sky. As discussed last week, the Biden Administration has issued the necessary notice to its citizens to watch what it is worried about in Hong Kong. The State Department’s “business risk advisory” might have read like an act of diplomatic theater.  But to assume this means the US is uninterested in escalating its standoff with Beijing over Hong Kong is to underestimate those who are today running US policy on China.

The warning is probably just the first of several to come. To understand why this might be so, a new book that went on sale this week is worth reading. Written last year by the person who is now heading the National Security Council’s China strategy, its title is “The Long Game: China’s Grand Strategy To Displace American Order”.

Rush Doshi demands attention. One of a large crop of new hires under “Asia Czar” Kurt Campbell at the National Security Council, Doshi is part of a dramatic shift of resources within the new administration. For those who hadn’t noticed, the US is now essentially out of the Middle East and and Afghanistan. President Joe Biden is redirecting substantial resources into Asia-oriented analytical units across a range of departments and agencies, such as the DoD, CIA, NSA, and FBI, as well as the State and Treasury Departments.

This is not the same government that talked about pivoting to Asia back in 2012, or that launched a series of headline-grabbing and self-harming trade restrictions in 2018. Biden’s team is patient and focused. After six months of walking softly, gathering allies and lining up targets, the NSC appears almost ready to start wielding a big stick. Doshi is the man who will ensure it is sanded, polished and ready for use against China.

It would appear he is still warming up. Sanctions against Chinese individuals are pretty useless; everyone knows that. And the business risk advisory on Hong Kong was not that strongly worded. However, context is everything, and it helps to look at what else the Biden Administration has been doing. The callout this week against China for the Microsoft Exchange hack was more terse. The G7 is united again over Xinjiang. Japan is talking about defending Taiwan. Although none of these efforts are yet what anyone might call “game time”, they are pointing toward something bigger to come from the NSC.

As Brooker admits, the final bit of the Hong Kong notice carried a key message: Just because Beijing might expect American firms not to comply with its sanctions, don’t expect for a minute that Uncle Sam won’t be forcing everyone to comply.

All that is needed to go up a level in the US-China confrontation is for a corporate target of significance to be sanctioned. It doesn’t need to be BOC. Any tech titan listed on the Hong Kong stock exchange would do; preferably one that has sold facial-recognition software to the security forces cleaning up Hong Kong’s once-boisterous media landscape.

The person likely to be driving the bus on this doesn’t look like an anti-China zealot. Doshi has a charming demeanour to go with a Harvard PhD and, yes, he is a Princeton man. Like many others in the Biden team, he is among the smartest of the smart; an ethnically updated version of Graham Greene’s Quiet American. Here is an excerpt from his book, courtesy of Sinocism.

If that doesn’t sound like someone urgently wanting to bring the rain on Hong Kong’s financial sector, it’s probably because American foreign-policy intellectuals are adept at the wolf-in-sheep’s clothing act. They struggle not to smirk when asked about Wolf Warriors. This is a person who will, however, like Henry Kissinger before him, not hesitate to write a brilliant paper about the need to bomb Hong Kong back into the financial Stone Age.

In all seriousness, foreign businesspeople in Hong Kong have to start thinking harder about the rising risks of being deeply invested here. This is not only because of the NSL. It is because of the potential for open financial conflict to erupt between the world’s hegemon and its challenger in a place “Where China Rules and the US Dollar reins” (Bloomberg).

Is this being overly alarmist? The bigger question, surely, is whether foreign businesspeople can afford not to consider it. Uncomfortable it might be to acknowledge, but world history is made from key turning points in the affairs of powerful nations, such as the one we are living through now. Like Prague, Berlin, or Paris before, Hong Kong is a prime candidate to become an early victim when the shooting starts, albeit in a financial conflict.

No one who will speak publicly about what this means for foreign investors seems beyond irritated at the moment. Reaction from the American Chamber of Commerce in Hong Kong initially came across like plantation managers who have been away in the colonies too long. After declaring that they were “well aware” of the risks in Hong Kong, suggesting the temerity of their home government was not appreciated, they did tell Bloomberg that there was, in fact, something bothering them, and they would be mightily pleased if the Hong Kong and Chinese governments could provide some guarantees about the free flow of information. It can only be assumed – Amcham wouldn’t respond to queries – that this new-found sense of urgency is due to proposed “anti-doxxing” regulations that threaten Google, Twitter and Facebook. Amcham also wants someone to assure them about the sanctity of “commercial law”, whatever that might be. Currently, they don’t see the NSL affecting it.

This, too, is understandable. Amcham is in the business of advancing its members’ interests. It would be a surprise if those members worried about the closure of firebrand newspapers or the arrest of children’s book-writers. Still, perhaps Amcham’s leadership should take another flip through the National Security Law to see if it might theoretically apply in commercial cases where a state-owned enterprise faces an American one over something like, say, data centers. And then they might want to read Doshi’s book to ponder how soon the US and China are likely to come to blows on the hallowed floors of Hong Kong’s stock exchange.

This risk is probably worth more than simply mulling a short on 0388.hk. Conflict between the US and China in Hong Kong is potentially a game-ending scenario for foreign businesses in China. Sanctions on individual Chinese tech companies might be no more than a lost opportunity for some banks, or a writedown for shareholders forced to sell low. But sanctions on the entire Hong Kong stock exchange are not unthinkable. Neither is the idea of cutting off the Hong Kong dollar from the global financial system. Under Trump, it was a laugh. Not anymore. These guys don’t do diplomatic theater.

There will likely still be plenty of gradually escalating warning signs to heed. No one in Washington will send in the drones before Blackstone and Vanguard have had time to get out. But as pointed out previously in this column, it’s not as if Doshi and his bosses have much leeway. They can decide the “where and when” of an attack, but the current ideological rigidity of American political debate pretty much rules out the “whether”.

Here is just one scenario worth considering. There are midterm Congressional elections coming up next year. Republican voting-restriction shenanigans at state and city levels have been raising the blood pressure of Democratic strategists. Using photogenic, intellectually unassailable policy hitmen like Doshi to seize the high ground on China would be the clever thing to do. Moreover, it could be useful for Biden’s re-election bid. His team would be mad not to put China at the center of their Make America Greater Than Trump Can campaign.

A hit on Hong Kong wouldn’t be that difficult to pitch to the American people. Justification need not center on the proverbial little old lady on Bus Route #35, who has her life savings stuck in a fund invested in Chinese companies that refuse to meet US accounting standards. It could also be because Hong Kong is where China rakes in more than 70% of its hard currency to invest in, among other things, Made in China 2025. What better place to target if you are the comptroller of the hard-currency world?

From another perspective, it could be portrayed as an act of restraint. A tech war is already under way, as is a cyberwar, and a shooting war is to be avoided at all costs. Which leaves only one other kind of war to launch.

Admittedly, there are distractions that might yet save this city’s bacon. The average American voter would struggle to know whether Hong Kong is in China or Japan. And the intricacies of stock exchanges and financial sanctions would make most Fox viewers switch over to football. Pushing dastardly data-manipulating Chinese companies out of Manhattan might be enough for Biden’s team to claim they have taken the battle to the enemy and won. Then Washington can go back to squabbling about trillion-dollar job-creation bills.

But that would have been more likely under a Trump team. Not these guys. Doshi and Campbell know, and have profited from knowing, Hong Kong. (They have stepped away from their consulting business while on national duty.) These are seasoned pros who don’t just think about real-estate deals. Plus the hundreds of people they now have devoted to this issue. It would take a lot for a team like this to size up the landscape between the US and China and not see Hong Kong as a perfect spot to take a stand. Certainly better than in the South China Sea or Taiwan Strait.

There is undoubtedly a lot at stake for American capitalists in Hong Kong. It is not only the business that Citibank, Goldman Sachs, or AIA does here. It is the potential of what they stand to gain from China in the coming years, as the country creaks open its wealth-management industry. Amcham is not necessarily wrong to say they think Hong Kong is still a great place to do business. There is a ton of money being put on the table in the Wealth Connect Scheme alone. Premier Li Keqiang was talking just yesterday about further opening the door to foreign capital, albeit the right kind of foreign capital.

However, it is not as if Biden’s team has been failing to take this into account. Unlike Bridgewater’s Ray Dalio, these people have spent years, decades, reading up on thousands of years of Chinese history. They have engaged with China in multifaceted ways, not only handing over vast sums of cash. And, from their point of view, they have tried really, really hard to find another way to deal with China’s non-compliance to its diplomatic and trade commitments. Now they have decided it’s time to play hardball.

China is not going to budge in response. The National Security Law is broad-ranging for a reason, so that Beijing doesn’t have to waste valuable time in the middle of a conflict explaining things like why an anti-doxxing law is necessary. Or why “commercial law” will never be as important a consideration as national stability ahead of the 20th Party Congress.

Perhaps foreign businesspeople cannot be expected to worry about such things. Maybe their fiduciary duty to shareholders will force them to wait until after the shooting has started to decide whether it’s time to pack their toothbrushes. The smarter ones, on the other hand, might like to read the memoirs of Carl Crow, “Foreign Devils in the Flowery Kingdom”.

Crow might not be as famous a historical scribe of China’s investment potential as, say, Marco Polo, but he existed, and prospered, in Shanghai during its glory days of the 1930s. The final few pages of his book are devoted to the last day he spent at his office in the old International Settlement (he was American.) He had settled in at his desk and was thinking about how this year, for the first time in seven, he was hopeful of turning a profit in his advertising business. The prime reason for his optimism was that the government seemed to be cleaning up its act, cracking down on corruption and building some much-needed infrastructure. Just then, he heard a loud bang, and was unpleasantly surprised to be told that the Chinese military, then under the command of Chiang Kai-shek, had decided to pre-emptively attack the Japanese fleet that was tied up in Shanghai. It was the beginning of the end of the foreign business presence in Shanghai, which had lasted nearly 80 years. Crow steamed out of Shanghai a few days later with little to carry, never to return.

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