(ATF) Promulgation of a new Hong Kong National Security Law has been widely predicted, notably in the US and the UK, as sounding the death knell for Hong Kong as a global financial centre.
To date, the evidence of stock market and currency moves points in the opposite direction – onward and upward.
In the run-up to the introduction of the Law at 11pm on June 30 – 23 years after the Handover of Hong Kong to China and the introduction of the Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China, which mandates promulgation of a national security law – Hong Kong stocks rose significantly as did the Hong Kong dollar (HKD).
The mainland Chinese currency, which had seen a bout of weakness as the US Trump administration and the US Congress threatened and then implemented sanctions, has recovered all of the losses incurred in late May and June. Today,July 6, 7pm HK time it traded at 7.0228 to the US dollar, its strongest level since March 18.
The offshore CNY (CNH) is even stronger, at 7.0188. The HKD is flush up against the upper limit of its trading range against the USD and is quoted at 7.7500.
Such Chinese currencies' strength is good news for investors in Hong Kong and mainland Chinese stocks as well as bond investors in China. Notably, investors in onshore Chinese corporate bonds will be relieved to see yuan strength to offset their concern over apparent reluctance of the People’s Bank of China (PBoC – China's central bank) to drop interest rates or adopt other sizeable monetary easing measures.
Is all this some sort of Chinese government manipulation as a Bloomberg headline this morning suggested?
There is no serious evidence of that.
The PBoC set morning parity of the yuan at 7.0663 today. It's rapid rise in trading hours by 0.63%, a large percentage move for currencies, was clearly market driven and not the result of intervention.
The fact that the offshore yuan, which can react more freely than its onshore cousin, rose even more than the onshore version provides evidence of the judgment of foreign investors.
As for the move up by Hong Kong and mainland stocks today by nearly 4% (HSI) and more than 5% (CSI300), these gains were driven by service-sector stocks reacting to a record July 3 Caixin Services PMI of 58.4, which, in turn, confirmed the strong positive reading of the Caixin Manufacturing PMI of 51.2 (July 1).
China has managed to cope resolutely and successfully with the coronavirus crisis. Markets confirm this. The US has not. And currency markets make that point: The dollar index (DXY) is down 0.4% and trades at 96.7720, near its March lows.