Three Chinas and two bull markets?

Washington and the West’s media are distracted by the twists and turns of the legal challenges to the US election result launched by Donald Trump. China is using this opportunity to bury ‘bad news’.

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  1. Charles Stanley

The People's Republic of China, with its 1,440 million people, is the world's second-largest economy and main power rival to the US. President Xi Jinping has an iron grip on this vast country – and pursues the long-held policy of One China towards provinces and islands close to the mainland.

Hong Kong, with its 7.5 million people, is now unified as a "Special Administrative region of the People's Republic" alongside Macao. Taiwan sits as an offshore island to the east resisting government and control from the People's Republic.

With 23 million people, Taiwan has undertaken a prosperous development. whilst not being admitted as a nation to the United Nations, the World Health organisation and some other international bodies. These global quangos are afraid of the Chinese reaction were they to accept Taiwan as an independent country. China asserts that Taiwan is part of China, but has de facto accepted that Taiwan is not under its governmental control for the last seventy years – and is protected by its own, independent US alliance.

From the Chinese perspective, it is unfortunate that the per capita income of Taiwan is $54,000 a head and the income of Hong Kong is $49,000 a head – compared to mainland China at $10,000. In earlier stages of its economic development, China was keen to associate herself with Hong Kong's prosperity and markets – but now, given the much bigger scale of the mainland economy, Beijing’s priority is to ensure political control and loyalty to its political system – whatever the economic cost to Hong Kong.

China moves as the US is distracted

With that in mind, China has taken advantage of the US preoccupation with counting the votes in their Presidential election – and the legal uncertainties over who won – to make a strong move to close down all political opposition in Hong Kong. Under a recently-minted law, the four fiercest critics elected to the Legislative Assembly in Hong Kong were dismissed from office, triggering the resignation of all the other elected representatives with opposition views.

China had already tightened rules governing who could stand for election and made sure the government could not lose control of The Legislative Council of Hong Kong whatever the election result, as well as delaying the elections for one year.

It is notable that, prior to the Trump administration upping its words and actions in defence of Taiwan, China did not rush to welcome Mr Biden. Beijing has every reason to suppose that Mr Biden will be just as tough on China as President Trump – and may indeed try to criticise them more over human rights than the outgoing President.

China is always more stung by political criticism than by tariff wars. President Trump's decision to fire his Defence Secretary and appoint Christopher Miller, currently director of the National Counterterrorism Center, will probably lead to a stricter response to China provocation in the South China Sea. It was also followed by Secretary of State Pompeo declaring that Taiwan is not "part of China".

Deteriorating trust

This, obviously, angered Beijing significantly and led to the usual denunciations. This year, the US has stepped up its oversight of the sea lanes and offshore areas from China and has hired civilian planes to assist with surveillance. US Marines are currently exercising with Taiwanese troops to ensure vigilant defence of the island.

This year so far, the economies of Taiwan and China have fared much better than the rest of the world. China had a poor start to the year with Hubei province in lockdown and Wuhan within it a city under very strict controls on all movement to tackle the original outbreak of the virus.

China, after the 76-day closures, declared success in eradicating the disease – and got its economy back to something resembling normal. After a slump in output in the first quarter, the economy rose in both subsequent quarters – and is widely forecast to deliver an overall positive growth rate of 2% for 2020 as a whole.

But Taiwan did even better

Kept out from World Health Organisation advice and strategy, it rapidly developed its own test-and-trace systems, imposed strict controls on people coming into the country – and kept the virus under good control. Quarter 1 saw 2.2% growth, Quarter 2 just a 0.6% dip and quarter 3 a positive 3.33%.

Taiwan will show decent growth for the year as a whole. Hong Kong, in contrast to the other ‘two Chinas’, has experienced five quarters of negative annualised growth rates, with the downturn predating the virus impact. It is expected to produce a negative 3.5% for 2020 overall, with some recovery from the 9% fall recorded at the peak of the pandemic.

Hong Kong is suffering from the changing political climate as well as Covid-19 controls. This September, tourist arrivals were around 97% down on last year. Exports of services generally were down by a third. Investors and large companies are rethinking plans to locate or grow in the territory, with investment down by 11%. Unemployment has risen to 6.4%. The prospects for Hong Kong property have darkened as rich individuals and businesses look elsewhere.

China reins in tech power

Last week, President Xi launched an unexpected attack upon the very successful internet and social media companies China has grown. Alibaba, Ten Cent, Xiaomi and JD all fell sharply on news that the government is considering new regulations to curb monopolistic behaviour.

The State Administration for Market Regulation is drawing up rules against actions like subsidising services, squeezing out smaller competitors and sharing sensitive consumer data between large players. These private sector companies with links into the West have become too powerful, so the state wishes to remind them who is the boss. Variable Interest Entities, a mechanism for channelling foreign investment into Chinese corporates with possible listing overseas, will need special approval. Ant Group's initial public offering was pulled.

This attack upon the success stories of the 2020 stock market rally now means mainland China is up around 8% this year to date, with Taiwan up about 12%. Hong Kong languishes 8% down. Whilst there is a political risk from the regular testing of Taiwan's defences from the mainland, it looks as if the US defensive arm remains strong.

Meanwhile, the considerable political risk in mainland China has been underwritten by this latest attack on their technology success stories – and by the evolving authoritarianism of the One-China policy. There were two bull trends in the three Chinas. Hong Kong remains the one most at risk as it loses its freedoms and flexibilities that powered its status as a successful city-state and global marketplace.

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