China Troubles

By Matthew Klein |  Friday, May 22

Unpredictable. For U.S. markets, it was a quiet Friday before Memorial Day, which helps explain why stocks, interest rates, and commodity prices were mostly unchanged. The Dow Jones Industrial Average was down just 0.04%, with half of the thirty components going up and half going down. Meanwhile, the S&P 500 large-cap index was up 0.24%, with 270 components rising and 230 falling.

Boredom seems to be driving a surge in day-trading, Randall Forsyth reports. The one-time stimulus checks have often been used to bet on stocks. Sports gamblers without sports are now betting on companies without customers. According to TD Ameritrade, page visits to its “education center” spiked 280% in April compared to last year. These retail traders could be an extra source of liquidity -- and volatility -- during the normally quiet summer months.

That doesn’t mean there wasn't any real news. Two big developments have already come out of the Chinese government’s annual “two sessions” conference, which began on Friday in Beijing. First, the central government didn’t bother announcing a growth target for gross domestic product in 2020. The government started announcing targets in 1994. According to Prime Minister Li Keqiang, the spread of the coronavirus in the rest of the world means there are too many “factors that are difficult to predict.”

(It's not unlike all the S&P 500 companies that have pulled their financial guidance for the rest of the year.)

In the past, provincial and local government officials’ efforts to hit the yearly growth target often led to wasteful investments, bad debts, and environmental degradation. Reformers have been pushing to ditch the target for years. The chaos of the coronavirus provides a convenient justification for doing something that should have been done a long time ago. For better or worse, the Communist Party will not take responsibility for whatever happens to China’s economy this year.

The other big announcement was about Hong Kong. When the U.K. agreed to turn over the city to the People’s Republic of China, one of its conditions was that the Chinese government would guarantee Hong Kong’s distinctiveness and autonomy at least until 2047. There would be “one country” but “two systems.” Over the years, the CCP has reneged on that treaty commitment, betting (correctly) that the British had neither the will nor the ability to challenge it.

Last year, Hong Kong proposed a new “national security” measure that would make it possible to extradite “criminals” to the mainland. Protests forced the government to withdraw the measure, but it’s now back in new form. The latest proposal is that, instead of moving people from Hong Kong to the mainland, China’s Ministry of State Security will simply set up shop permanently in Hong Kong, free to detain and interrogate people locally. The Hang Seng index plunged 5.6% in the worst one-day move since July 8, 2015.

The changes in Hong Kong could have a significant impact on U.S.-China relations, as well as on Hong Kong’s preferred trading status with the U.S., as Reshma Kapadia explains. It’s another potential source of tension between two of the world’s largest economies.