What has happened
Markets took a risk off tone yesterday and that has continued into today as Hong Kong stocks struggle from the news released from the National People’s Congress.
People’s National Congress – Domestic Agenda
After a two-month Coronavirus-induced delay, China’s key annual political meeting of the National People’s Congress (NPC) opened earlier today. This year’s NPC is particularly important as 2020 is the deadline of China’s 13th Five-Year Plan, as well as the beginning of the next. There are two key takeaways. First, for the first time since the early 1990s, China has abandoned setting a gross domestic product (GDP) target given the economic uncertainties of Coronavirus and the impact on global trade. Second, the NPC has announced fresh fiscal stimulus, proposing a wider budget deficit and extended support for Small and Medium-sized Enterprises.
National People’s Congress – US/China
US/China tensions will also be stoked however as the NPC also announced that it would be push ahead with a proposed Hong Kong security law which is likely to draw substantial opposition both within Hong Kong and abroad. Beijing’s move to assert its authority over Hong Kong comes as the “one country, two systems” model comes under increasing strain. When the sovereignty of Hong Kong was handed over from the UK to China in 1997 it represented 18.4% of Chinese GDP, in 2018 this was merely 2.7%. Under this context China has a greater appetite to curtail the special status of Hong Kong on political grounds as the economic risk is less acute.
What does Brooks Macdonald think
Donald Trump also criticised the leadership of China yesterday and has outlined a new strategic approach to China in a letter to the US Congress. Whilst China has been far less provocative than the US has been, neither side appear to be looking to deescalate the rhetoric meaningfully. That said the NPC did say, in relation to the Phase One trade deal, that it would “mutually enforce” the deal suggesting that it had little intention of stepping away from its obligations to buy US goods. Even though markets were down yesterday, and Europe is pointing lower today, risk assets have been remarkably resilient given the escalation of tensions. This is largely to do with the huge financial support provided by monetary and fiscal stimulus. That said, we are in the short term happy to retain a more neutral positioning towards equities given this enhanced risk.