Hong Kong’s economy and 7.4 million inhabitants are in a state of shock.
Shops are closed, tourism is down, property prices are falling. The streets are filled with rallies, protests, and lately, violence.
It all started more than 200 days ago, on the last day of March. That’s when this wave of rallies against Chinese interference began.
Despite Hong Kong being the world’s third most important financial center, this crisis is barely mentioned in the news.
But its repercussions for markets here in the U.S. could be huge…
China is the world’s second-largest economy. Any economic crisis there would quickly spread worldwide, and hit U.S. markets as well.
And if China clamps down on the Hong Kong protests harshly – or worse, sends in its army – the blowback could be huge. While the World Trade Organization (WTO) has no process by which a member country can leave or be expelled, the EU and the U.S. could push for it anyway.
If the Hong Kong protests come to a bloody end, that move is likely to gain wide support worldwide. That would result in China losing its trade status with most countries around the world almost overnight, with potentially catastrophic consequences for its economy.
While there’s a very slim chance of the dominoes falling until China gets expelled from the WTO, a more likely scenario would be U.S. and other democratic countries imposing economic sanctions on China – which would be a much bigger deal than tariffs have ever been.
Alternatively, all this turmoil could give President Trump cover to withdraw the U.S. from the WTO, which he has been signaling he’s interested in for some time.
The protests in Hong Kong may not be getting much screen time in the U.S. right now, but they are well worth paying attention to. The lack of coverage is no doubt due to large news conglomerates being reluctant to anger China’s government.
But the protests themselves could drag down China’s economy, sending shockwaves throughout U.S. and global markets.
Escalation of the protests and China’s response to them would mean that stocks with significant exposure to revenue from China (or supplies coming from China) could face limited growth. We’ll look at some companies with such exposure in a future article.
D.R. Barton, Jr.