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Risks in end of US' special relationship with Hong Kong

Daryl Guppy
Daryl Guppy • 6 min read
Risks in end of US' special relationship with Hong Kong
For many companies and investors, Hong Kong has been the safe way to enter China. The recent six months of street disruptions have not really impacted this market connection, but that may change.
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(June 5): For many companies and investors, Hong Kong has been the safe way to enter China. The recent six months of street disruptions have not really impacted this market connection, but that may change. It is not our purpose here to discuss the merits of action announced at the recent two sessions meeting in Beijing. Our purpose is to understand the potential impact on Hong Kong of President Trump’s announcement that America will begin the process of ending the special relationship with Hong Kong.

The headline analysis has a focus on just how much more difficult it will become for US businesses to work in Hong Kong. Some business activities may be banned, forcing a withdrawal of US companies. At one extreme, it has been suggested that US banks may be required to cease operations in Hong Kong.

Certainly, any change in visa status would be a major impediment to the smooth operations of businesses. These visa changes may mean that Hong Kong is treated like mainland China, requiring a lengthy visa-application process rather than the current visa-free status.

Ending the special relationship may also hinder capital flows into and out of Hong Kong as a result of sanction-style activity. The 1,300 US companies in Hong Kong may face tariff restrictions impacting heavily on Hong Kong’s trade with the US. That puts around US$66 billion ($92 billion) at risk, of which US$50 billion is US exports to Hong Kong that may be hindered.

That is the headline analysis, but it needs to be set against a broader background proposed regulatory changes that pre-date the two sessions announcements.

A more significant impact of ending the special relationship is usually overlooked. This is the potential for the US to restrict sales of sensitive technologies to Hong Kong firms. This forms part of a broader push that includes not just Hong Kong, but other countries as well.

At the end of this month, the US Bureau of Industry and Security is amending the Export Administration Regulations to expand license requirements on US exports and re-exports intended for military end-users in China. It broadens the list of items and expands the definition of “military end-use”. How will the product ultimately be used and who will ultimately use the product determines the need for US licensing. These regulations aim to control the export of dual-use items that have both civilian and military application. This can be a very broad definition.

For example, the manufacturer of computers in Hong Kong using some American components may be blocked from selling to a Chinese business that “supports” the Chinese military as one of their many customers. The changes to Export Administration Regulations may require this Hong Kong business to apply for US licensing, which in turn may be delayed or refused as the special relationship undergoes a reset. The potential impact on the Hong Kong economy is more significant, so investors are watching carefully for the in-depth impact of these changes. It may be that Hong Kong is no longer a safe way for investors to enter China.

Technical outlook for the Shanghai market

The Shanghai retreat can be best described as a stumble in the trend. The rebound from the low near 2,802 has been dramatic. The rally moved quickly above the 2,850 resistance level. The index then gapped up and moved above the longer-term uptrend line.

This is surprise volatility and it calls for the placement of a new trend line to take into account the dip and rebound. This is shown as trend line B. The relationship between trend lines A and B will help define the developing uptrend continuation.

Trend line A was used to define the initial uptrend starting from the low near 2,702. This acted as a support feature until it was broken with the strong move below the line on May 22. The subsequent rebound rally is now using the value of trend line A as a resistance feature. This suggests the uptrend will continue but the upside is limited by the resistance offered from trend line A. The index may continue moving upwards towards long-term historical resistance near 2,980.

Trend line B has three anchor points and defines the support features of the longer-term uptrend. A retreat from trend line A resistance has the first support feature near 2,865. This is the upper edge of the long-term Guppy Multiple Moving Average (GMMA) indicator. The second support feature is the historical support level near 2,850. The third support feature is the value of trend line B currently near 2,840.

The combination of these two trend lines appears to create an expanding wedge pattern; however, these patterns usually have trend lines that diverge in direction — one line moving up and the other moving down. This does not apply in this situation with the Shanghai Index, because the pattern of diverging lines starts from an extreme low, following a substantial downtrend retreat, and both lines are sloping upwards, albeit at different degrees.

The continued divergence in the two trend lines does create an environment of increased volatility. In the current condition, it suggests the index could retreat 73 points to the lower trend line B and still remain in a long-term uptrend. Investors will need to develop techniques to manage this larger volatility range.

Investors should also watch the behaviour of the long-term group of averages. This group has compressed and moved sideways, but they are now moving upwards and beginning to separate. This separation suggests investors are coming back into the market and supporting the uptrend development.

A widely separated long-term GMMA provides strong support for any market retreat and signals a stronger, more sustainable uptrend.

Daryl Guppy is an international financial technical analysis expert and special consultant to Axicorp. He has provided weekly Shanghai Index analysis for mainland Chinese media for more than a decade. Guppy appears regularly on CNBC Asia and is known as “The Chart Man”. He is a national board member of the Australia China Business Council.

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