China: Grip on Hong Kong Tightens

Robert Petrucci

China policy is a long-term game being played against nations with short term outlooks. 

China Grip on Hong KongChina has arrested at least 50 Hong Kong activists over recent days whom the mainland views as opposition democracy leaders. China has already postponed an election to the Hong Kong legislature until September 2021, saying this is due to coronavirus concerns. The arrest of the activists has highlighted existing concerns regarding China’s Hong Kong policy, and its evolving relationship with Taiwan. The U.S. has reacted with stronger rhetoric from President Trump regarding military cooperation with Taiwan, and a ‘secret’ report from the US has been leaked which outlines how the U.S. plans to defend the island and nations within the South China Sea.

Prominent news outlets are reporting that China is also considering new mandates which will make it more difficult for Hong Kong democratic activists to participate in the scheduled vote as representatives. China has displayed political determination over the arrests of opposition leaders in Hong Kong earlier this week, and its actions over the past two years shows that it is intent upon quieting dissent.

China’s struggles within Hong Kong have been exhibited globally. However, China’s actions have largely gone unchecked by foreign governments who seemingly have a lack of will power to confront China publically. While some governments have uttered criticism, it essentially has had no impact on China as their projection of power tightens.

President-Elect Biden’s China Policy is Unclear

US / China relations may be entering a transitional period as a new administration takes office in the US, replacing the Trump administration which made suspicion of China a major electoral and policy plank.

China has stiffened its policies in Hong Kong, which goes against formalized mandates agreed upon when Britain handed over power to China. There was a declaration stating Hong Kong would be able to govern its territory and that democracy could remain vibrant under China’s supervision. What was promised to be a soft glove policy by China has turned into a progressively stern grip.

President-elect Joe Biden will take power on the 20th of January and China is likely anticipating his leadership positively. However, China still must deal with surviving Trump administration policies which have sought to curtail China’s trading power. Biden's China policy is not clearly defined and could be more lenient towards China diplomatically as well as economically.

Recent political chaos in Washington has not gone unnoticed in China and the storming of the Capitol Building in Washington last week was promptly compared by the Chinese to the 2019 protests in Hong Kong which saw its legislature building attacked.

Economically China is dealing with a downturn because of the effect of coronavirus and its effect on manufacturing and consumer spending domestically. If China is not confronted by the West over its Hong Kong policy, or confrontational outlook regarding Taiwan, perhaps the one weakness China cannot control would be domestic economic hardship. If China's economic struggles increase it could create unrest if its population becomes resentful of perceived differences between the haves and have nots. This is a growing problem in the West also.

China is a world power and its influence in Asia is expanding. Japan and Australia are two nations among others who disagree with China regarding sea lanes and their effects on shipping for logistics and trade, military access for navies, and open water territorial oil rights of nations.

AUD/JPY Bullish Trend

AUD/JPY Bullish Trend

Implications on Forex of China Tensions

Traders need to be careful how they interpret news regarding China and the reactions it can cause with dynamics in Forex and commodities short, mid, and long term. The JPY, AUD and USD will be affected by China policy, but traders should not overreact. The AUD/JPY and USD/JPY will be important barometers regarding developing US foreign policy shifts as the new White House administration implements its complex relationships with China.

Australia has certainly seen political tension with China grow over the past year. The AUD/JPY has seen a long-term bullish trend emerge and if political tensions in Asia do not escalate the higher trend could continue with a long-term target of 83.00. If political tensions sour in Asia due to problems with China relationships, the AUD/JPY could experience a downturn in value and challenge the 77.00 handle.

The USD/JPY has seen a long term bearish trend emerge because of weak USD policy via the Federal Reserve and US Treasury. Foreign policy with China could affect the USD because of changes to trade doctrines which could play a role in forex valuations. The USD/JPY should continue to be monitored and if current policies in the US become more tolerant towards China, the bearish trend may continue and a test of the 100.00 level could play out.

China uses a long-term political philosophy with its one-party rule as a method, versus other nations which are not uniform and change depending on democratic changes in leadership positions and policies. This gives China's Communist Party a strategic upper hand. However, China needs good relationships with other countries to buy its large volume of exports and maintain manufacturing agreements in place, to successfully plan for its economic future.

USD/JPY Bearish Trend

USD/JPY Bearish Trend

Foreign governments may be willing to turn a blind eye to China’s recent political polices in Hong Kong. China may take this as tacit approval of its pursuit of a “one China” policy and become more aggressive with Taiwan diplomatically.

A hands-off policy from the West towards any confrontational Chinese steps may be perceived as investor-friendly by markets over the mid-term and until otherwise proven. If the incoming White House administration led by President-Elect Joe Biden is seen as passive towards China and begins to incrementally overturn Trump doctrine, it will likely build confidence within many global financial institutions. Investors like clarity, and a more sedate global dialogue among the world’s powers and China may prove beneficial for investors and speculators alike.

Robert Petrucci
Robert Petrucci has worked in the Forex, commodity, and financial profession since 1993. Important aspects of his work involve risk analysis and advisory services. As an advisor in a Family Office he maintains a conservative approach for wealth management and investments. Robert also works in private finance with investors and companies delivering financial and management services.

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