Pompeo: Hong Kong is no longer autonomous from China
Secretary of State Mike Pompeo tweeted that he reported to Congress that Hong Kong is no longer autonomous from China. Kim Catechis, Martin Currie’s Head of Investment Strategy joins Yahoo Finance Akiko Fujita to break down the growing tensions between Beijing and Washington, D.C.
Video Transcript
AKIKO FUJITA: But the big headline we're tracking today is China. Of course, secretary of state Mike Pompeo tweeting a short time ago saying that he has told Congress that Hong Kong no longer enjoys a high degree of autonomy from China. He goes on to say the US stands with the people of Hong Kong. But the significance of that tweet, this could potentially signal the US moving to strip Hong Kong of its special trading status-- that, of course, has been a big question mark here.
This comes as China's parliament is expected to move forward with a new national security law that could reduce the legal status of Hong Kong right now. To break all of this down for us and what this means to the markets, we're joined by Kim Catechis. He is he is the head of investment strategy at Martin Currie. And, Kim, it's good to have you on today. We'll get to some of the big movers today, but I do want to get your thoughts on what's playing out between China and Hong Kong.
As it relates to China, there's certainly a lot of moving pieces-- the tension with Washington. But let's start with what we're expecting overnight here. If China moves forward with this national security law, we've already seen the protests flare up. What are the market implications we should be looking for?
KIM CATECHIS: Hi, Akiko, thanks for having me. Yeah, look, this is a pretty massive story. We can't say that we are surprised, because this has been coming quite a long time down the road. And you're quite right to point out it's coming at a pretty advanced stage of the escalation game between the US and China. So let's take it bit by bit. Domestic China, first of all-- the fact of the matter is, you know, Beijing believes, rightly or wrongly, that they've been very patient with Hong Kong for a long time.
And the facts, economically speaking, are that Hong Kong today is a lot less meaningful to China than it was in 1997-- I mean, significantly less. So it's-- you put those two together, and clearly, that's a recipe for a not very good outcome for Hong Kong. In terms of what other countries can do or, you know, the US government or Congress or Senate passing laws-- I'm not sure that's actually going to have any impact at all.
Because as far as China is concerned, this is a domestic sovereignty issue. And they're not going to change course. So I think we should expect that this new security law gets passed. We should expect a degree of protest which, frankly, we've already been seeing for the better part of a year already in the streets. And we should expect the Hong Kong market to be hurt. In terms of investors standpoint, you know, elsewhere, I'm afraid it doesn't really, I don't think, play that big a role. It won't impact investors in US markets, and it won't affect investors in the Asian market.
AKIKO FUJITA: What about the move we should be watching, though, out of Hong Kong? I mean, you point to a fact that I think a lot of people have cited, which is that Hong Kong simply doesn't hold the kind of significance to China that it did during the handover back in '97. And yet, what we saw over the weekend was Beijing, at least according to reports, trying to reassure the multinational companies that do business in Hong Kong to say, well, this is really going to be much more stable, which seems to suggest that there is still significance there. So I'm wondering if this law passes, what are some of the companies we should be looking for and the moves they're likely to make? Or will they move out of the financial hub at all?
KIM CATECHIS: You know, that's quite a tough question to answer, for the simple reason that there's such a heterogeneous group of companies there-- different nationalities, different, you know, headquarters. A lot of them moved to Hong Kong initially because that was the only place that was close to China. Those that, you know, in the last kind of 15 years have-- you know, more of them have been opening in Hong Kong-- in Singapore rather, I should say, rather than Hong Kong.
And I think today, you've got to remember a whole bunch of these guys are already in Shanghai. So I'm not 100% sure how many of these companies are going to up stakes and move their offices. I mean, even those that have traditionally been in Hong Kong for many years, you know, have got substantial offices in Shanghai or Beijing-- mainly Shanghai. And as a result, I don't think that changes a heck of a lot.
In terms of the question of, you know, what does it do to companies we should be watching, again, I don't feel that there's a clear steer here. I think it's going to be case by case, and individual boards making up their decisions.
AKIKO FUJITA: OK, Kim, let's bring the conversation back here to the US. Looking at the market actions, there is no question that the renewed activity that we're seeing from the reopenings has certainly led to the optimism in the market. I'm looking at your notes here. You say the market's going to trade in line with the incidents of business shutdowns forced by COVID-19. So does that just suggest that with the reopening, the market moves higher? And if, in fact, that's the case, should investors be shifting up their portfolios right now in line with that?
KIM CATECHIS: You know, that's another tough question. Look, the fact of the matter is I think on a day to day basis, we have such an absence of clarity, of what's going on that the market is resorting to knee-jerk reactions to short term signals. So one of the things people are going to be watching is the rate of new cases of confirmed COVID-19. If that rate stays low or flat or doesn't grow very much after different states are reopening, then I guess the market's going to assume that actually things are OK, we're through the worst, and we can start looking forward to companies reporting business as usual.
Now, if we take-- and excuse me for taking you back to China very briefly-- and I go there simply because they were first in and first out kind of thing, along with South Korea and Taiwan. And the latest information we've got on the consumer behavior there is that the consumers-- you can split them into two groups, white collar, blue collar. The white collar guys have basically been working from home. They've been furloughed, or they've got some kind of safety net. A lot of the blue collar people haven't had that much of a safety net, so they're less optimistic.
But the people who would normally travel on tourism out of China have got money to burn in their pockets. So they're going out and consuming. And Louis Vuitton, for example, has actually raised prices last week in China, and seeing sales picking up-- I'm not expecting that exact parallel to replicate in the US. And I think one of the complications for investors when they're trying to see how the US behaves is that you've actually got a fragmented market in the US in the sense some states are opening completely others are opening, you know, on a scale of, I don't know, 10, maybe 3 out of 10, and others are not yet opening.
So there's going to be a patchwork quilt effect to this. And I think that means that the market is going to get excited and then a little bit disappointed and then excited again, et cetera. And as long as these new cases don't keep building and we don't get another kind of second wave, as they call it, then I think that we can probably see decent price action from here.
The one thing you mustn't forget, though, and I say this in answer to your question about should investors be putting fresh money to work-- that is that if you're looking for the S&P 500 is today, it's actually really at a punchy valuation here. And I don't believe that earnings downgrade [INAUDIBLE] come through yet. So you may find that that becomes a realistic barrier to make people hold back. And personally, I think it would be prudent.
AKIKO FUJITA: OK. Kim Catechis, always good to talk to you-- really appreciate your time today.
KIM CATECHIS: Thank you, Akiko.