Trade War Update: Hong Kong Erupts And Nasdaq Frowns Upon New China IPOS – Forbes

It is not getting better. And your best bet is to assume that it will not get better anytime soon, especially next month.

If this past weekend in Hong Kong is any indicator, China’s National Day celebration on October 1 is going to shine a brighter light on the risks this city’s political crisis has on the trade war.

Sunday was one of the worst days in the months-long anti-China protests in Hong Kong. An Indonesian journalist was shot in the face with rubber bullets. And roughly 100 protesters were arrested as Hong Kong has firmly lost its patience with the non-stop protest marches in one of the world’s most important cities.

Sunday’s protests also marked an escalation of violence on behalf of the protesters themselves, most of them under the age of 30. At least 25 people were sent to the hospital today with severe injuries, according to the South China Morning Post.

Some parts of the city were set ablaze by people hurling molotov cocktails at police. Over the last several months, protesters have come prepared to do battle against police, with videos showing some of them training how to shield themselves from baton strikes. More and more are coming out prepared for physical altercations.

What initially started as a fight over an extradition bill that would have allowed for Beijing to try Hong Kongers in mainland Chinese courts has revealed itself to be a movement setting itself up as the opposition to Communist Party rule.

Hong Kong’s current One Country, Two Systems situation ends in 2047, when most protesters will be in their late 40s. The end of that system means Hong Kong just becomes another Chinese state and the city falls under Beijing’s direction. These protests are being billed by some on the ground as a last ditch effort to wrestle Hong Kong from the Communist Party.

Washington is paying attention.

Any crackdowns by Beijing against the protesters risks hurting trade talks. Worse yet, it risks the special trading status Hong Kong enjoys with the United States. That status gives China a nice source of dollars as Hong Kong’s currency is pegged to the dollar. And a potential back door to avoid tariffs.

Meanwhile, the trade war has shifted away from being one where tariffs are the tools of choice to exact concessions from China’s government. The new threat is an increased regulatory oversight from the Securities and Exchange Commission, and real legislative pressures from China on two issues: human rights and finance.

Senators Marco Rubio (R-FL) and Jeanne Shaheen (D-NH) are trying to convince a federal employee pension fund known as the iFund not to go along with a new benchmark, the MSCI All Country World Index, because it invests in Chinese companies, including those that have been sanctioned at one point by Washington.

In another sign that the financial industry is paying close attention to all this, Nasdaq said that it would make it harder for Chinese small-caps to launch IPOs on the exchange, Reuters reported today.

Reuters called Nasdaq’s curbs on small Chinese IPOs “the latest flashpoint in the trade war”.

Indeed it is. The trade war has gone from tariffs on trade, to tech bans against Huawei – China’s largest telecom device maker – to now targeting securities markets as a potential pressure point.

Wall Street has long been fond of China. New financial products have propped up over the years to give American investors access to China’s slowly opening stock and bond markets. The Barclays Bloomberg Global Aggregate Index now includes China sovereign and quasi sovereign bonds. JP Morgan Indexes are now adding Chinese securities. Both MSCI and FTSE from the U.K. are all increasing their weightings to China. That means more foreign fund managers are mandated to invest in China companies if they are following the benchmark. China’s financial service industry has no such weighting to the U.S., so most of the flow has been a one way street with U.S. money flowing to China and China money restricted by law to flow here.

Many Chinese stocks fell sharply on Friday following financial media rumors that the White House was actually considering delisting Chinese companies from U.S. stock exchanges.

A U.S. Treasury official said on Saturday that President Donald Trump’s administration was not considering blocking Chinese companies from listing shares on U.S. exchanges “at this time”.

Like Sunday’s explosive protests in Hong Kong, anything goes on the China front. Investors should prepare accordingly and avoid companies that can be a source of political risk, or trade risk. The China companies most likely to be targeted are state-owned or will be those deemed connected to human rights issues in both China and Hong Kong.