Updated: Aug 20, 2019
Lifeguard Lawton is feeling Hong Kong Angst, seeing Hong Kong risk wherever he looks, even in ink on the Hermosa Beach Strand.
The angst is being created because I see the China trade war and Hong Kong events to date more negatively than most market participants. Market prices should already be lower based on what we knew before the Hong Kong Airport was taken over.
Then, all hell broke loose last week and demonstrators closed HKG down for two days. On the week risk asset prices were down a bit, but not enough to reflect the consequences of these events, and future potential risk.
Closing the airport took the demonstrations to a whole new dangerous level. HK was effectively cut off by the demonstrators, something no government could afford to allow to continue for very long. Further shutting of the airport or escalation of violence may cause Beijing to move in.
If that happens, in my opinion, it could tip the global economy, already reeling from the trade war, into recession. Why? Global growth is already slowing due to the US-China trade war. If China moves on Hong Kong with police or para-military it will cause a re-evaluation of all things related to China and have enormous unintended consequences. Several months ago, it was unthinkable that China might intervene in Hong Kong. Now there are troops on the border. With hundreds of thousands of people on the streets confronting well equipped police, it is just a matter of time until things explode. This definitely is not priced into markets. This explains my Hong Kong Angst.
A Little History
Going back to 1997 when I helped manage the handover of Hong Kong back to China as an advisor to China's central bank, The People's Bank of China, I knew there would be rough patches later. (1) One country, two systems was dissonant, but it got the job done. The thinking at that time was that Hong Kong would learn from China, and China would learn from Hong Kong, and as each moved toward each other, it would ultimately be one country, one system (and that is still the plan). Hong Kong was returned to China without bloodshed, and up until now, it has been an enormous economic success.
The internal inconsistencies unfortunately between Hong Kong and China boiled over before they could be resolved, resulting in the current crisis.
The Hermosa Beach Strand
This all bothered me, so I decided, reluctantly, to leave Lunada Bay, and head over to the Hermosa Beach Strand for a jog to clear my head. 7.73 miles, 15,014 steps. Slow. It did not help.
Everywhere I looked I saw signs of potential doom emanating from Hong Kong.
I imagined dogs on the Strand were worried about Hong Kong;
that troops were garrisoned on Manhattan Beach;
like the troops massing on the border of Hong Kong;
but, it was just my imagination.
The dog was looking for a treat. There were no troops on Manhattan Beach. It was prep for the Manhattan Beach Open Volleyball Tournament.
While my imagination was running away with itself on the Strand, the takeover of the HK Airport was real as are the Chinese troops massing on the border of Hong Kong.
We will not comment on the political issues involved. That is up to Hong Kong and China to resolve. We have concern for the protestors and the stability and well-being of 1.4 billion people in China and my investors.
It is in everyone's best interest for a de-escalation and negotiation between the parties involved, with no outside interference.
Damage Already Done
Even if a resolution is reached tomorrow, irreparable damage has already been done to Hong Kong's economy and status as a global financial center. China's financial power will shift to Shanghai and perhaps other regional cities such as Shenzhen and Kunming. Internationally, many will move to Singapore and elsewhere.
Here on the Strand, people are still enjoying hitting volleyballs at each other, while people in Hong Kong are throwing projectiles and tear gas back and forth.
As I finish my run, the Hong Kong Angst remains. The airport is open again, but demonstrations continue. I look at the unsuspecting investors who believe they are safe from the Hong Kong situation half a world away. Nothing could be further from the truth. One miscalculation on the streets of Hong Kong could bring Beijing forces into the fray. This would be disastrous for HK, China, the US and the world.
Do not get financially tattooed from events in Hong Kong.
(1) Frontera, "Behind The Scenes: The Story Behind The Return of Hong Kong to China 20 Years Ago, William Lawton, 3 July 2017, https://frontera.net/news/asia/behind-the-scenes-the-story-behind-the-return-of-hong-kong-to-china-20-years-ago/