According to reports, China plans to retaliate as the U.S. House of Representatives passed a bill on Hong Kong, which is likely to lead to a U.S. stock market slump as it fuels uncertainty.
The bill–called House Resolution 543–strengthens the relationship between the U.S. and Hong Kong, criticizing China’s “interference” in Hong Kong and sanctioning officials deemed “responsible for undermining fundamental freedoms and autonomy in Hong Kong.”
The U.S. stock market has seen a large upsurge in the past week as both the U.S. and China announced significant progress in the trade talks after the agreement of a partial trade deal.
If China retaliates following the approval of the bill by the House as said by the Chinese government, it presents a new geopolitical risk for the U.S. stock market, potentially placing the prospect of the second phase of the trade deal in danger.
China unhappy, stock market anticipated to be rattled
Prior to the passing of the bill, Geng Shuang, a Chinese Ministry of Foreign Affairs spokesman, said that China urges the U.S. Congress to stop the advancement of the bill to prevent the worsening of China-U.S. relations.
“China strongly urges certain people in the U.S. Congress to grasp the situation, immediately stop advancing the bill regarding Hong Kong and interfering in Hong Kong’s affairs to avoid further damaging China-U.S. relations.”
A spokesman for the Hong Kong Special Administrative Region (HKSAR) Government reiterated the stance of the Chinese government on Oct. 14, stating that foreign legislatures should not interfere with the internal affairs of the HKSAR.
Bad timing for the bill
Even after the agreement of a mini trade deal with China, strategists in the U.S. said that the deal does not include sensitive areas of the trade talks including intellectual property protection, industrial policy reforms, and technology transfer that makes it difficult to warrant a comprehensive deal.
The comments of the official Chinese media and Hu Xijin, the editor-in-chief of the English and Chinese editions of the Global Times, seem to favor the prospect of emergence of challenges in signing a broader trade agreement in the short term, which is yet to be reflected by a U.S. stock market that has rallied in the past two days.
The timing of the approval of the bill amidst relative uncertainty regarding the future of the trade talks and whether China will push through in signing a first phase trade deal is expected to create more pressure on the U.S. stock market despite its recent rally ahead of major earnings report releases.
China-U.S. relations still the main focus of investors
According to LPL Research, the prospect of the U.S. stock market is anticipated to improve as small steps in the U.S.-China trade talks increase business confidence.
“The U.S.-China trade conflict is unlikely to be resolved anytime soon, but we believe any small steps forward could increase business confidence and spark capital investment, lifting corporate profits,” read the report.
However, the retaliation of the Chinese government over the bill would leave the small steps towards a comprehensive deal in jeopardy, establishing a challenging environment for businesses to expand heading into 2020.