Full force

Five Things - Asia

Honk Kong faces a new reality after China's new security laws come down in full force. The U.S. House of Representatives unanimously passed a bill approving sanctions on banks that do business with Chinese officials involved in the pro-democracy crackdown. And the Federal Reserve shies away from more yield-curve control. Here are some of the things people in markets are talking about today.

Arrests, Confusion, Despair

Nine arrests, 300 people taken into custody, tear gas, water cannons and pepper spray: Hong Kong faced a new reality on Wednesday as China began enforcing a sweeping security law that could reshape the financial hub's character. The new law's provisions went beyond what many investors, democracy advocates and even pro-Beijing politicians expected, prompting warnings it would have a chilling effect on free speech. Thousands of demonstrators carrying umbrellas and American flags clashed with officers, and prominent activists joined the protests even while cutting ties with political groups Tuesday, seemingly to avoid implicating each other. Pro-democracy lawmakers have expressed concern the law will be used to bar them from seeking office in September elections — and leaders in Beijing and Hong Kong did nothing to allay those worries during briefings to explain the 35-page law. The law's vague language generated confusion about what activities were allowed. While some investors said the measure would bring stability following sometimes-violent protests last year, others expected to see a flight of capital and talent. Meanwhile, the U.K. will allow almost 3 million Hong Kong citizens to move there, risking a further escalation of tensions with China.

Sanctions And More Sanctions

The U.S. House of Representatives passed by unanimous consent a bill imposing sanctions on banks that do business with Chinese officials involved in cracking down on pro-democracy protesters in Hong Kong. The bill, which is similar but not identical to a measure passed by the Senate last week, would have to be approved by the Senate before going to President Donald Trump for a signature. And that's not all: The U.S. is also preparing to roll out long-delayed sanctions to punish senior Chinese officials over human-rights abuses against Muslims in Xinjiang, two people familiar with the matter said. The sanctions are likely to target Communist Party officials responsible for the persecution of minorities in Xinjiang, according to the people, though they declined to say when the sanctions would be rolled out. The administration is acting under the 2016 Global Magnitsky Human Rights Accountability Act, which give the U.S. broad authority to impose human-rights sanctions on foreign officials. The sanctions were delayed amid negotiations over a U.S.-China trade deal.

Markets Lift

Asian stocks looked set to follow U.S. shares higher with modest gains after positive vaccine developments and better-than-expected manufacturing data tempered concern over a jump in coronavirus cases. Treasuries and the dollar fell. Futures rose in Japan and Australia, with Hong Kong due to reopen after a holiday. The S&P 500 rose for a third day while the Nasdaq Composite jumped to a record as an early trial of an experimental shot from Pfizer and BioNtech showed it's safe and prompted patients to produce antibodies. Traders also monitored minutes of the Federal Reserve's June meeting that revealed various participants viewed the economy needing support "for some time." A closely watched measure of manufacturing jumped in June to the highest in more than a year.

Yield Curve

The Federal Reserve isn't ready to commit to yield-curve control. Officials showed no readiness at their June meeting to commit to any limiting policies, but did reveal an eagerness to provide more guidance in coming months on the future path of interest rates and asset purchases. "Many participants remarked that, as long as the committee's forward guidance remained credible on its own, it was not clear that there would be a need for the committee to reinforce its forward guidance with the adoption of a YCT policy," minutes published Wednesday of the June 9-10 Federal Open Market Committee meeting showed. YCT refers to yield caps or targets, a strategy of limiting the yields on government bonds at specific maturities. It's a tool some central bankers believe can help reinforce an existing commitment to hold policy rates low for an extended period, as the Fed is already doing. 

Ease Off

China's central bank is slowing down the pace of monetary easing amid signs of economic recovery, handing disappointment to investors who have worried about tightening liquidity and rising bond yields. Since early May, the People's Bank of China has tolerated a steady increase in money market rates and the highest 10-year sovereign bond yield in five months. And although a fresh liquidity injection was signaled by the government two weeks ago, Governor Yi Gang is taking an unusually long time to deliver. Instead, Yi has told markets to start thinking about an "exit" from the looser financial policies seen earlier this year, even as the country faces a highly-uncertain path out of the historic economic slump in the first quarter. For now, he's backed by the data — a manufacturing survey this week points to continued improvement in both demand and supply in June. 

What We've Been Reading

This is what's caught our eye over the past 24 hours:

And finally, here's what Tracy's interested in this morning

I keep seeing the wave of companies expected to list on the Hong Kong Stock Exchange described as an "affirmation that Hong Kong will continue its role as an international financial center," or something similar. I don't see it that way at all. A big chunk of the companies expected to list on HKEX are Chinese firms that were listed in the U.S. and may be choosing to move thanks to rising U.S.-China tensions and the potential introduction of the Equitable Act, which would force Chinese companies to comply with American accounting standards or be delisted. The other major cohort are Chinese companies run by tycoons like Richard Liu and William Ding, as my Bloomberg colleagues report today.

The fact that Chinese companies are retrenching from listings abroad hardly seems like evidence of Hong Kong's future as an international financial center. Rather, it appears to be another instance of balkanisation in financial markets, and yet another way in which China is deepening its influence over the city's business and economic life at the same time that it tightens the political screws through the introduction of the national security law.


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