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In case you were too busy reading updates on SpaceX’s historic (but delayed) human spaceflight, then you should know that the U.S.-China tensions could heat up over the next few days.

See, China has recently approved plans to impose key laws on Hong Kong, which could change how the U.S. does business with Hong Kong and China.

Why is China all up in Hong Kong’s business anyway?

Bank of ChinaBack in 1898 the U.K. – who already had control over the Hong Kong Island and the Kowloon Peninsula – secured a 99-year lease on the surrounding islands later known as the “New Territories.”

But 99 years is NOT forever and leaders soon worried about the logistics of giving back the leased New Territories while keeping the other parts of Hong Kong.

So, in 1984, U.K. Prime Minister Margaret Thatcher signed the Sino–British Joint Declaration to treat Hong Kong as a “Special Administration Region of the PRC,” which means that China has to give it some form of autonomy through the “One Country, Two Systems” policy for a 50-year period after the lease expires on July 1, 1997.

The “one country, two systems” scheme includes rights and freedoms of speech, press, and assembly, as well as independent judicial flex under the Basic Law.

It’s set to expire in 2047 but, as the 2019 extradition bill protests showed, a lot of Hong Kong citizens are not okay with giving more control to mainland China.

So China is feeling like showing Hong Kong who’s boss.

China is Boss of Hong Kong

What exactly is China planning?

A few hours ago, China’s National People’s Congress (NPC) passed a proposal to impose a national security law in Hong Kong.

Hong Kong LawNPC’s Standing Committee will still iron out the deets, but it’s widely believed that the law would lead to arrests and harsh punishments to those who engage in acts of secession, subversion of state power, terrorism activities, and foreign interference.

China might even establish “special institutions” in Hong Kong to enforce the law!

And you thought getting blocked on Twitter is bad.

NPC is expecting to bypass Hong Kong’s legislature in enacting the law as it believes Hong Kong’s government has “failed to deliver” a security bill in the 23 years it had the Basic Law.

Meanwhile, Hong Kong’s legislature had to postpone a session after three lawmakers figuratively (and literally!) kicked up a stink.

The three pro-democracy lawmakers are hoping to delay a bill that would criminalize insulting or abusing mainland China’s national anthem.

How will these affect traders?

Junk BoatYesterday, U.S. Secretary of State Mike Pompeo officially told Congress that “China is modeling Hong Kong after itself,” so much so that “Hong Kong is no longer autonomous from China.”

This is a BFD as it gives Congress the ability to begin stripping Hong Kong of its rights under the 1992 U.S.-Hong Kong Policy Act, which recognizes Hong Kong as distinct from China.

If Congress pushes through with this “nuclear option,” it could, at the very least, affect:

  • Tariffs on Hong Kong imports, which hit $6.3 billion in 2018
  • U.S.’ exports to Hong Kong, which reached $37.3 billion in 2018
  • 1,200 U.S. companies that either has regional offices or headquarters in Hong Kong
  • 85,000 American citizens in Hong Kong
  • Hong Kong citizens who would have more requirements to get a U.S. visa
  • Other economic superpowers who could follow the U.S.’ lead and impose China-level restrictions on Hong Kong
  • Other foreign companies who won’t want to deal with U.S.’ restrictions on China
  • Boy bands and artists who now have one less country to count in their 3-country “world tour”

But nuclear options are saved for nuclear situations. It would be weeks, if not months before China finalizes the details and enact Hong Kong’s new Security Law.

Meanwhile, Trump has so far only promised “something interesting” that we’ll know before the week ends.

For now, traders will not likely take on too many risks related to the U.S. – Hong Kong – China trade relationships until they find out what exactly the Trump administration and other major economies are planning and how Beijing could react to those measures.