Hong Kong Bill Unlikely to Derail Partial Trade Deal, Citi Says

December 1, 2019 Updated: December 1, 2019

WASHINGTON—Just a day before Americans headed off to celebrate Thanksgiving, President Donald Trump signed two bills to support pro-democracy protests in Hong Kong, prompting a strong reaction from China.

Investors fear the signing of these measures could disrupt the recent progress between the two countries on a “phase one” trade deal. Analysts, however, expressed a confident view, saying that the U.S. support for Hong Kong won’t stall the negotiations.

The first of the two bills Trump signed on Nov. 27 was the Hong Kong Human Rights and Democracy Act, which stipulates sanctions against Chinese or Hong Kong officials who have violated human rights in the city.

“We believe it was inevitable that the bill would become law due to strong congressional support,” Johanna Chua, a Citi economist based in Hong Kong, wrote in a report. “Though there was some hope that President Trump would wait for the bill to automatically become law without signing, which could be less provocative to China.”

The Hong Kong Human Rights and Democracy Act would require the U.S. secretary of state to certify annually whether Hong Kong is “sufficiently autonomous” from China to warrant the special trade privileges currently afforded to it.

Since the signing of the bill, pro-democracy protesters have held two rallies to thank Trump and U.S. lawmakers. The measure is widely seen by protesters as a form of economic pressure for the Hong Kong government and the Chinese communist regime, which relies on the financial hub as an important source of capital for the mainland.

The other bill signed by Trump prohibits the United States from exporting crowd control equipment to the Hong Kong police force.

The timing of the U.S. action does introduce some risk of delaying the phase one U.S.–China trade deal due to political tensions, Chua said.

“But we do not expect the [Hong Kong] bill to derail the prospect of the trade deal, as both sides are likely to separate the [Hong Kong] issue from the trade talks,” she said. “It is our base case that the phase one trade deal could be sealed by early 2020 with September tariff rollback.”

A new round of tariffs went into effect on Sept. 1, pertaining to more than $125 billion in Chinese imports. If a deal isn’t reached by Dec. 15, an additional round of U.S. tariffs will kick in.

Trump, in a statement, said that the measures were “enacted in the hope that Leaders and Representatives of China and Hong Kong will be able to amicably settle their differences leading to long-term peace and prosperity for all.”

Partial Trade Deal

In October, the world’s two largest economies announced they had reached a partial trade agreement, in principle, on intellectual property, financial services, and agriculture.

Trump said that there could be two or three phases in the China trade talks. Both sides are currently working to finalize the phase one agreement for signing. However, uncertainty about the timing of a summit between Trump and Chinese leader Xi Jinping remains.

Last month, Trump suggested they could sign the partial agreement in the farm state of Iowa, which has been hit hard by the trade war.

The Citi analyst isn’t the only one who has expressed a sanguine view.

The Hong Kong Human Rights and Democracy Act is a “significant issue” for China, according to Amy Celico, principal at business strategy firm Albright Stonebridge Group.

“I don’t think it’s enough of an issue to derail the trade talks,” she told CNBC.

“There are still incentives on both sides to push for a deal, provided they can agree on the terms,” Julian Evans-Pritchard, senior China economist at Capital Economics, told the BBC.

On Nov. 28, China threatened to take “strong countermeasures” against the United States, and its foreign ministry summoned U.S. Ambassador Terry Branstad to protest Trump’s signing of the Hong Kong Human Rights and Democracy Act into law.

The tension also damped some of the positive sentiment in the stock market on Nov. 29.

U.S. stocks fell with both the S&P 500 and Dow Jones Industrial Average losing 0.4 percent in a shortened trading session. Asian markets also closed lower, led by Hong Kong’s Hang Seng index, which fell 2 percent.

Follow Emel on Twitter: @mlakan
RECOMMENDED