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Hong Kong & Beyond: Why The West May Too Feel The FX Burn

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Asian markets, especially markets in Mainland China will be facing some serious scrutiny during Christmas 2019 due to the ever-worsening situation in Hong Kong. Although it may not look that the international community is doing anything against China, we can easily say that their attitude towards Chinese goods and business in the East, in general, is souring considerably.

The uproar that the Hong Kong protests have brought to the world has been extremely effective at helping Western leaders realize that this was an amazing political weapon against China. Weakening this sleeping giant’s soft power is in the interest of almost everybody, but the current state of the market demands that goods be imported from there. So what would change this Christmas specifically? Why should Chinese manufacturers be afraid of the month to come?

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The factual evidence of a tense Chrismas in 2019 can be seen with the Singapore exchange, as multiple Eastern companies saw their shares sink, most of which due to the troubles in Hong Kong. Remember that this city is like a cheat code for China to export its products. Almost everything that comes from China, goes through Hong Kong or Shenzhen directly. Losing control over this city means quite a significant drop in export volumes as well as time wasted on new negotiations for renewed trade routes and reformation of local regulation to allow Mainland Chinese harbours to dispatch craters.

Feeling the burn

Not only is there serious speculation about the potential losses in China during Christmas, but there are also concerns over whether Hong Kong will remain a tied nation to the Mainland. Considering the fact that Trump signed a new bill which supports democracy in Hong Kong, it is completely possible for the United States to directly intervene in the pro-democratic elections in the city from here on out. Intervening doesn't mean that they will lobby or support anything physically, but guarantee honest and real election and not faked and pre-determined ones that China is notorious for.

The burn is being directly felt through the depreciation of the Hong Kong dollar. Even though China wants a weak CNY and HKD, there was always a barrier to how much it should depreciate.

You see when the local currency is bottomed out and most of the wealth is going towards manufacturers and already rich people, a community of the nation tends to become more and more aggressive. Considering that China is predominantly a Communist state, having a massive wealth inequality would be hypocrisy to a completely new level. They could have a people's revolution all over again, all of it stemming from a small city in the south called Hong Kong.

The West may feel the burn too

Although many currencies like the JPY and the GBP managed to bounce back up when trades started registering today, it doesn't necessarily mean that the economy of the West and democratic nations of the East is heading to a desirable threshold.

Multiple small businesses in Western countries are going to have to find alternative methods of importing cheap Chinese goods and services in order to conduct their business.

What this means is that they will have to utilize local labour, thus jacking the prices up considerably and decreasing the overall quality of life. This could cause a decrease in tax rates in most Western nations, thus limiting government income. As you can see, almost everything is intertwined.

The currencies have started jacking up so much that some businesses are forced to move over to cryptocurrencies as a means of guaranteed stability as well as a boost to their market value. For example, the list of crypto escape rooms has started growing considerably in the United Kingdom. This specific sector of the entertainment industry is pretty much reliant on cheap building materials from Mainland China. Should that supply be cut off, there's no telling how much they would have to drive the prices up to match their clientele's budget.

The reason why escape rooms are a perfect example of depreciating industries in the West is due to their affordability. In order to be affordable, they need to have cheap equipment that has the potential to last them at least 1 or 2 years. Chinese product allows them to do so thus keeping their prices low. But once the resellers of Chinese products such as the VR versions of escape rooms feel the burn on slowing trade, there could be issues for the final promoters of the activity itself.

This applies to pretty much every other business focusing on Chinese retail.

Salvation through giving up

At this point, the CCP backing down from Hong Kong is the only salvation they can find in this mess. Allowing the city to continue its operations for the long-term and agreeing to the treaty of integrating Hong Kong in 2047 is probably the best decision. Until then, China can simply continue its soft power in the region and hope that trade resumes itself in the short term.

If not, then this year's Alibaba record of $35 billion in sales is going to fall extremely short next year 11.11.20 for sure.

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