How China’s new Hong Kong security laws could impact global business

HONG KONG - Commenting on controversial new Chinese security measures to be introduced in Hong Kong, the gobal financial group Natixis says it seems increasingly hard for Hong Kong to have the cake and eat it - "so something will need to go".

"We hope that whatever needs to go leaves Hong Kong's offshore centre status reasonably unscathed," Natixis says. "This is not only important for Hong Kong but for Mainland China and the rest of the world."

As Natixis sees it, Hong Kong is in the eye of the storm, caught in the crossfire of US-China strategic competition.

"The latest threat is that the US may lift the long-granted special status (afforded to Hong Kong)."

Immediate market reaction in Hong Kong was higher pressure on the Hang Seng Index (HSI), but less so for the Hang Seng China Enterprises Index (HSCEI).

"The divergence seems to indicate that domestically-related shares are riskier from investors' perceptive," Natixis says.

"The market also expects a weaker HKD as shown by the widened spread between the spot and the 12-month forward. However, the spot is still leaning towards the strong-side of the trading band.

"The RMB has also depreciated against the USD.

"Lastly, Hong Kong's money market rates, HIBOR, have moved up, but the reason could be the upcoming secondary listings of mainland Chinese firms, which are generally associated with deposit withdrawals from investors to purchase shares."

At this juncture, Natixis says, it is very difficult to predict exactly what will happen next. "But different possibilities exist, which are worth discussing.

"Starting with the potential lift of the Hong Kong Policy Act, the letter of the Act is more related to visa arrangements and trade (mainly export controls) than to the financial sector.

"Export bans could have a direct impact on the tech race that China and the US seems to be engaged in.

"Moving beyond the direct consequences of lifting the Hong Kong Policy Act, the financial sector clearly comes next. One of the most disruptive actions, which could potentially be taken from the US, are sanctions.

"Moving beyond the above risks, we cannot forget that some of Hong Kong's strengths do not seem to be affected by the current situation, at least not for the time being, such as a fully convertible capital account with very large forex reserves and strong financial regulations with a low tax environment."

www.natixis.com (ATI).