One Country, One System

'Hong Kong is China now'... One country, one system... Left on an island with nowhere to go... A great corporate migration?... A flash point for the U.S.-China trade war... Both sides of Congress actually agree... How to profit from fear...

The ax has fallen in Hong Kong...

The Chinese government has officially imposed a national security law on the island of Hong Kong – Asia's financial hub – that ends the territory's "special" status.

In other words, it destroys the autonomy and freedom that made capitalism- and democracy-loving Hong Kong different from China for more than two decades.

I (Kim Iskyan) wrote about this proposed measure in the May 26 Digest... and now, China is imposing it.

As the Economist explains, it gives Chinese leaders in Beijing "sweeping power to crush dissent in the territory using its own secret police and even its own courts" and "is one of the biggest assaults on a liberal society since the second world war."

The law broadens the definition of, and increases the punishment for, crimes labeled as terrorism, subversion, secession, and collusion with foreign powers.

An old friend of mine in Hong Kong put it this way...

'Hong Kong is China now. There's nothing else to say'...

The ruling Communist Party of China hammering the nails on the coffin of Hong Kong's unique status wasn't unexpected. We knew the world's most populated country would do it eventually, but it's happening about 27 years ahead of schedule...

As we wrote back in May, the situation dates back to when the island of Hong Kong ceased being a British colony in 1997 and agreed to become a semiautonomous region of China – with its own democratic system – through the year 2047...

Under the terms of the deal, after 156 years of British rule, Hong Kong would be allowed to maintain the capitalist system and its way of life for 50 years – after which the large metro area would lose its specialness and become just another part of China.

"One country, two systems," as the arrangement was called, hid the huge contradictions between the two approaches... But it was a good way to kick the can down the road for the next generation.

Today, here we are.

But it's the severity of the new measures that is shocking...

Calling for the independence of Hong Kong could be punishable by life imprisonment...

One of the world's most vibrant and dynamic cities is being silenced with a poisoned, industrial-strength muzzle. The new rules took effect a few days before the July 1 anniversary of Hong Kong's 1997 transformation.

Over the past 23 years, China has steadily undercut the "one country, two systems" arrangement to increase its influence in Hong Kong. But since Hong Kong was China's economic and financial lifeline to the rest of the world, Beijing had to tread carefully.

Now, though, that has changed significantly... China is currently the world's second-largest economy (and closing in fast on the U.S. for the top spot).

In 1997, Hong Kong accounted for around 20% of the Chinese economy – compared to just 4% today. Chinese companies now have a lot of options aside from Hong Kong to raise capital and woo investors.

And China's plans to develop a massive Greater Bay Area megacity that integrates Hong Kong, Guangdong, Shenzhen, and other cities into a technology giant will dilute Hong Kong's regional influence.

What's more, by allowing Hong Kong's resistance – like 2 million people marching in the street last year – China was concerned that other parts of the country (like Tibet and the predominantly Muslim Uyghur region of Xinjiang in northwestern China) might get the wrong idea.

And the Chinese government felt like it needed to show Taiwan – which China views as a rebel region – that it won't be pushed around.

So China is taking away Hong Kong's special status – and turning the island into just another Chinese city. In terms of population, Hong Kong doesn't even make it into the top 10 of China's largest cities.

Stay or leave?

When I was in Hong Kong late last year, a lot of people I spoke with said they'd be happy with Hong Kong losing its special status. They were tired of the protests... and the violence, vandalism, and disruption that came along with them.

In turn, China probably won't be upset that a lot of the people who were raising a fuss for Hong Kong's independence may now leave the region... at least, those who can.

The United Kingdom recently announced that it would offer as many as 3 million Hong Kong residents the opportunity to settle there and eventually apply for citizenship.

But picking up and moving to a different country isn't an option for a lot of regular Hongkongers – those who can't afford a "Plan B"... who grew up in a free, vibrant Hong Kong... and whose families have lived there for generations.

A few days ago, I got back in touch with a young clad-in-black protester...

I met him at a rally in Hong Kong in December, when he was on the streets to try to bring "democracy and freedom" to Hong Kong. Now, he told me...

I can't be here anymore. But I have nowhere to go.

With Chinese state security agencies now operating in Hong Kong, protesters will feel a hard steel boot – including jail time and a trial by a Chinese (not Hong Kong) court.

"We urge Beijing to reverse course immediately," a spokesman for the U.S. government said. But international outcries against the measure won't do much...

Countries that could offend their largest trade partner (as China is for most of the world) by defending Hong Kong's 7.5 million residents will probably keep their rage in check.

Many companies with regional headquarters in Hong Kong are thinking about what's next...

We're talking about roughly 1,540 international companies. As Ian Bremmer, the head of political risk consultancy Eurasia Group, said...

If you're an international business that needs rule of law and an independent judiciary to protect your company and workers, leaving Hong Kong is not a question of whether, but when.

Singapore, where I live, will probably be a beneficiary of corporate and expatriate refugees fleeing Hong Kong.

What does it all mean for investors in Hong Kong?

So far, Hong Kong's markets seem pretty relaxed. The day after the law was passed, the Hong Kong dollar rose... as did its stock market, which is up since the May announcement that changes were on the way.

A flash point for the U.S.-China trade war...

What probably matters more than Hong Kong politics is that Chinese investors are increasingly important players in the Hong Kong market.

Seven of the 10 biggest stocks in the Hang Seng Index are based on the mainland – not Hong Kong. So Hong Kong's markets have already been taken over by China.

A friend who has been watching Hong Kong from the front lines for decades thinks China will ensure that the prices of Hong Kong stocks and other assets don't tumble. He recalled that back before the handover of Hong Kong from the British in 1997, China dramatically increased financial liquidity, fueling a stock and property market boom...

Back then, the Chinese government wanted to make "Hong Kong look like a very dynamic place at the time of handover back to China sovereignty," he told me. And today, China is putting the pieces in place to make sure that its takeover of Hong Kong's economy – which is expected to contract by around 5% this year – goes as smoothly as possible.

Indeed, Stansberry NewsWire editor C. Scott Garliss told us today...

China wants to make themselves look like the best place in the world for people to put their money.

So, the "death of Hong Kong" might not be so bad for investors in Hong Kong... at least not yet.

In any case, Hong Kong issue will continue to be a flash point for U.S.-China tensions. And as I wrote in the May 13 Digest...

In the U.S., rattling China's cage is good political business...

According to a recent poll by think tank Pew Research Center, 26% of Americans are positive about China – while 66% are downbeat on the country. In 2017, Americans were split evenly on their views of China...

So you can bet that U.S.-China relations will be a major theme of the upcoming U.S. presidential election...

We can easily see presumptive Democratic candidate Joe Biden and Trump one-upping each other on who's better placed to put China in its place... and things getting personal.

Today, both sides of the U.S. Congress actually agree that this is a problem...

Democrats and Republicans in Congress agree on two things right now, it seems...

1) The Federal Reserve has a blank check to throw gobs of digital dollars into the economy...

2) And China's decision to tear apart the 1997 agreement and end Hong Kong's freedom is a problem.

Last week, the U.S. Senate and House of Representatives unanimously approved a bill, dubbed the Hong Kong Autonomy Act, requiring mandatory sanctions on people who have helped end Hong Kong's "high degree of autonomy" from mainland China... and the financial institutions who fund them.

The bill is now waiting on President Donald Trump's signature. And as I wrote in the May 26 Digest...

The Chinese proposal about Hong Kong prompted President Donald Trump to warn that the U.S. would respond "very strongly" if China were to pass the bill.

The last thing the global economy needs – in the midst of a devastating pandemic and a historic global economic collapse – is another reason for the world's two largest economies to fight.

But U.S. and Chinese officials indeed now have another reason to feel tense when they're in the same room. This is equivalent to throwing a massive log of "risk" onto the burning global economic fire.

Speaking of uncertainty, volatility, and fear...

As I (Corey McLaughlin) discussed in last Monday's Digest, fears about a "second wave" of COVID-19 have dominated the mainstream headlines lately. (Even though we're actually still in the "first wave.")

The labels aren't the most important thing... The salient point is that investors have gotten spooked as the number of cases has spiked in certain states like Florida and Texas, stoking fears of more hits to the economy.

Just today, Stansberry NewsWire analyst Nick Koziol reported on data from analytics company SafeGraph, which tracks anonymous cell phone data with "points of interest" – like retail stores or airports.

As Nick wrote, SafeGraph's most recently reported data shows that foot traffic across the country began to edge lower in late June and that the brunt of the declines came from bars, sit-down restaurants, and retail stores... indicating signs of virus jitters.

And as our colleague Dr. David "Doc" Eifrig wrote in his most recent issue of Retirement Trader on June 26, the market's "fear gauge" – measured by the CBOE Volatility Index ("VIX") – has responded in kind recently...

Though still in a broader four-month downward trend, the VIX spiked recently as governors from New York, New Jersey, and Connecticut imposed a 14-day quarantine for travelers from coronavirus hotspots...

If you've been keeping up with Doc's weekly COVID-19 updates (at 14 videos and counting now), you know he's not as worried as most folks are in the media about the impact of the growing number of virus cases on the economy. As Doc wrote on June 26 in Retirement Trader...

Most of the coronavirus trouble has passed because of its seasonality. Plus, the president has said multiple times that the economy would not shut down again... even if there was a resurgence.

There's probably more fear in the market than there should be. And that's great for us.

Great that there's more fear in the market? That's right...

It might sound counterintuitive, but the more fearful investors are, the more they'll be willing to pay for "protection." And that means selling this protection – as Doc shows his Retirement Trader subscribers how to do all the time – becomes that much more valuable.

Over the past few months, the VIX has come crashing back down to Earth from its March record high of more than 80. But investors are becoming fearful again... They're starting to consider paying premiums for protection. Another volatility spike could come at any time.

That means this part of Doc's investing strategy – which will hand you cash for selling that protection to fearful buyers – is one that should thrive over the coming months.

Why Bitcoin Is the New Gold

In our latest video interview, Director of Research Austin Root explains how using bitcoin instead of gold to preserve wealth can be part of your overall investment strategy...

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New 52-week highs (as of 7/2/20): Amazon (AMZN), BlackLine (BL), Crispr Therapeutics (CRSP), DocuSign (DOCU), KraneShares Bosera MSCI China A Fund (KBA), Lonza (LZAGY), Microsoft (MSFT), ResMed (RMD), Sea Limited (SE), Spotify Technology (SPOT), The Trade Desk (TTD), Tudor Gold (TUD.V), and Vanguard Inflation-Protected Securities Fund (VIPSX).

In today's mailbag, feedback on last Wednesday's Digest about oil... and a general concern about the state of the economy. Do you have a comment or question? Send it to us at feedback@stansberryresearch.com.

"Since planes aren't flying, cars aren't being driven, and electric cars will displace fossil fuel vehicles, it appears someone has to create a new use for oil." – Paid-up subscriber Carmen P.

Corey McLaughlin comment: Any ideas out there?

"With an economy that is 65% consumer driven and over 30 million that still aren't working and many small stores going out of business, please explain the rose colored glasses recovery. I don't get it. I'm staying invested, albeit in more conservative companies, but it's not without major trepidation." – Paid-up subscriber Daniel H.

All the best,

Kim Iskyan and Corey McLaughlin
Singapore and Baltimore, Maryland
July 6, 2020