Connecting Some Dots Into Useful Economic Information – Week 1

Hong Kong:

The turmoil in Hong Kong, now in its fifth month, is remarkable from many facets. Contrast the relatively benign treatment of the protesters in Hong Kong with the Muslims that have been incarcerated in concentration camps, the Christians that are being persecuted and placed in prison, and reports of both sets of prisoners being used to harvest human organs for sale to others.

The reasons for the relatively benign tolerance of Hong Kong demonstrations as of the end of October when this article was being written is because of several economic forces:

  1. China needs Hong Kong’s access to global financial markets in order to fund the massive debt they have used for all their initiatives inside China as well as internationally.
  2. To counteract the trade war with the United States, China has in the last 12 months devalued its currency by approximately 10%, enough to offset the tariffs.

The devaluation of the yuan makes any investor with significant cash assets in the Chinese currency quite nervous. Nervous investors typically become motivated to find a way to move their cash to a more stable, law abiding country such as the United States. U.S. Treasuries?

For several years, China, in an effort to fight the outflow of currency has instituted “credit controls”. In China’s reports on its Balance of Payments there is a line item called “Errors and Omissions” which over the last several years (but in particular the last 12 months) has surged. Is this category being used to cover up the outflow of capital?

The bottom line is that a significant amount of capital is fleeing China. If China severely cracks down on Hong Kong that trend would accelerate and create more financial difficulties for China.

Please forgive my repetition, but China is an economic house of cards. When it falls, the ripple effects will be felt globally.

Our next blog series will examine the housing crisis (which is real), its origins, impacts and solutions. Stay tuned!