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China aims to tighten control over Hong Kong with security proposal

The Conference Board Senior Economist Erik Lundh joins Yahoo Finance’s Brian Cheung and Zack Guzman to discuss China's plans set up national security agencies in Hong Kong and the growing tensions between Beijing and Washington.

Video Transcript

ZACK GUZMAN: A lot of talk being made right now about increasing tension between the United States and China after we got the update out of China. Plans there by the National People's Congress today announced that national security organs of the Central People's Government would set up agencies in Hong Kong to fulfill relevant duties to safeguard national security there. Of course, that would create a problem under the basic law there that, basically, allows Hong Kong to operate independently. Chinese government powers are not supposed to have authority in the territory under the treaty that's been set up since 1997.

It's creating more tensions between the US and China, but also bringing back a lot of questions about the supposedly agreed upon trade deal, already question marks on that front due to the coronavirus pandemic, but now additional questions being raised as tensions rise. And, for more on that, I want to get to Yahoo Finance's Brian Cheung who has more details, Brian.

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BRIAN CHEUNG: Well, tensions are rising between the United States and China, specifically over this Hong Kong proposal, in addition to all the narratives around trade that had already been building up up until this point. You had secretary of State Mike Pompeo saying today they strongly urge Beijing to reconsider its disastrous proposal on national security.

And, just to back up a little bit about exactly what this proposal is, so the National People's Congress in the mainland passed a resolution on Friday that would clamp down on any acts that, quote, "threaten national security." Now, on the Chinese side of things, they bill it as a measure that would allow the People's Republic to provide resources to Hong Kong if they can't handle let's say, for example, a terrorism incident.

But the Hong Kongers argue that it's actually just a thinly veiled way of cracking down on dissidents. As we know, over the past few years, there's been a number of uprisings in Hong Kong over what they see as a threat to their sovereignty through a lot of these measures, whether or not it's this national security measure or things like extradition that they say threatens their freedoms, as Hong Kongers, which is supposed to be a one country, two systems set up, as you mentioned, that was signed into the treaty of 1997 when it was handed over from the UK to-- from the United Kingdom to China.

But the bigger issue, from the Hong Kongers' standpoint, is really also the way that it's being passed. So this is a measure, again, that comes from the National-- National People's Congress in the mainland. And they actually passed this by bypassing the Legislative Council in Hong Kong itself. You would tend to think that, in the sovereign territory of Hong Kong, if it is indeed sovereign, they would have some say over this. But the National People's Congress kind of skipped them and just passed this into law.

They still have to work through a number of other things. So it's actually not technically law yet. There still could be a couple of months before this actually comes into fruition, but a lot of people in Hong Kong saying this is the effective end of the one country, two systems setup. And this actually did send markets for quite a bit of a tizzy yesterday. The Hang Seng had a terrible day, falling over 5.5% in trading.

ZACK GUZMAN: Yeah, Brian, I mean, that would be bad enough for its worst one-day performance in almost five years. So that's just kind of speaking to the volatility now we had expected by that move. But I want to discuss this a little bit more with a man who knows the topic very well. That would be Erik Lundh. He's the Conference Board Senior Economist and a China economic expert, and he joins us now.

And, Erik, I mean, you just heard Brian describing kind of the backdrop. Here, today, we got the update from White House Economic Advisor, Kevin Hassett, saying that this move in Hong Kong is going to be very bad for the Chinese economy. We've heard both parties stressing that this is a very clear power grab by China here. So, when we talk about potential, I guess, actions here by the US to kind of make China back down from this, what do you think is on the table right now?

ERIK LUNDH: Well, I mean, we've already started to see some of this over the last week or so. There's been a lot of action on the US-China front that goes beyond just the Hong Kong issue. We saw new US restrictions on Huawei and as another way to clamp down on that technology company.

We've seen threats made to tank the phase one trade deal from the White House. And then we're also seeing threats to sanction Chinese companies and organizations that are involved in this Hong Kong security law. So there's a variety of things that are happening on the US-China front that really go well beyond just this Hong Kong situation.

ZACK GUZMAN: Yeah, and, when we dig into that, I mean, we had Senator Chris Van Hollen on the program earlier this week, he, of course, teaming up with Republican Pat Toomey in putting forward bills that have to do with kind of, you know, putting the pressure on the Chinese companies that trade here in the US. The bill would, essentially, bar, if it-- if it moves forward, Chinese companies from trading on US exchanges. So, I mean, we are seeing the tools and levers being pulled here in response to this. I guess, in historical precedents, what would you make of the tensions and where they are at now?

ERIK LUNDH: Well, yeah, I mean, first off, the de-listing issue of these Chinese companies, this isn't something that's-- that's brand new. This is an idea that's been kicked around for quite a while. There are-- there are some discrepancies in sort of the accounting oversight that US organizations have on Chinese lists-- the US-listed China companies. So the fact that this is actually being pushed to the forefront is just one more chip in this game.

In general, I mean, the US-China relationship has-- has had a very troublesome 3, 3 and 1/2 years or so. During political campaigns, presidential campaigns, it's fairly common to have rhetoric sort of spike on this issue and then sort of die off afterwards. But, as the Trump administration transferred into power three and change years ago, that wasn't the case. And we've seen, of course, the trade war escalate over that period of time.

In January, we saw a phase one trade deal signed between the two countries. So there was a degree of de-escalation in the relationship, but there were a lot of issues that were still unresolved by that deal. So those issues are coming back to the forefront. New ones are joining them with the coronavirus, of course, being one of the primary catalysts in shaking up the relationship. So I expect things probably to get worse over the coming months and years.

BRIAN CHEUNG: Erik, it's Brian Cheung. At the same time, though, you actually did have some reaffirmation from the Chinese side, actually just as recently as a day ago from the Chinese Premier Li Keqiang, that they still want to abide by the phase one deal terms, which were signed in January, but it feels like 900 million years ago.

I'm wondering. I mean, on the US-China side of things, if we take Hong Kong out of the equation, on the trade front, are things possibly even still intact if we were to come out of the other side of this, once the US economy does reopen, to actually maybe even get that phase two back on track if the Chinese are saying we're willing to play ball here?

ERIK LUNDH: Yeah, I don't think-- I think one of the bigger-- one of the big questions is, given the status of both economies, it's questionable whether or not China would be able to import, you know, the requisite goods and services that are embedded into the phase one deal because the US may not be producing them, or China may not have the demand for them.

In terms of-- you know, even if phase one does survive, moving onto phase two I think is a bit of a false hope and has been since the beginning. Phase two involves things like China making structural changes, opening up markets, becoming a more liberal economy. And I really don't see that as a possibility, especially under the leadership of President Xi Jinping. The country has, in many ways, moved in the opposite direction.

So phase one I think is-- holding on to phase one is the best of all outcomes. And, phase two actually being a hit, I don't see that as-- as a real possibility.

ZACK GUZMAN: Yeah, there are definitely a lot of people out there who had already doubted, even before all of this happened, before coronavirus had spread across the globe, that there even was a chance of getting any real progress done on the phase two front. But I want to thank you, Erik Lundh, Conference Board Senior Economist, for joining us today. I appreciate it.

ERIK LUNDH: Thanks so much.