UK & China Clash Over Hong Kong

Tensions between the UK and China have emerged as a fresh risk factor in recent weeks. The UK has refrained from having any direct spats with China over recent years while the US has continuously locked horns with the world’s second largest economy. However, in light of recent developments, the relationship between the UK and China has started to show signs of strain.

The UK openly criticised China over its newly implemented and highly controversial National Security Law in Hong Kong which grants Chinese authorities rights to arrest citizens under a broad and vague set of criteria which critics say leaves too much room for abuse of power. UK PM Boris Johnson announce that in the wake of the law coming into force a fortnight ago, the UK would be offering special five-year visas to any Hong Kong citizens looking to flee the region. China was quick to respond to the UK PM’s move, warning the UK not to meddle in Chinese affairs and accusing the UK of contravening international laws.

Johnson Bans Huawei

It seems a new standoff has now emerged as, in what has been called a major political U-turn, the UK PM announced this week that UK companies are prohibited from dealing with Huawei as of the year end. The highly controversial issue of the Chinese 5G network was thought to have been resolved earlier this year when Johnson approved use of the network. However, as part of the ban, any 5G apparatus already installed must be dismantled by 2027 and UK operators are warned not to purchase any further 5G equipment and to transition away from Huawei products within the next two years.

The announcement has come as significant shock and despite Downing Street’s insistence that the move is purely technical and not political, fuelled in part by the US decision that the Huawei network presents a security risk, China has already responded. Liu Xiaoming, the Chinese ambassador to London, called the decision “disappointing and wrong” adding: “It has become questionable whether the UK can provide an open, fair and non-discriminatory business environment for companies from other countries.”

China Retaliation Fears

There are now concerns over the potential for Chinese retaliation against the UK following the decision. Chinese state media is already taking an aggressive stance, calling for “public and painful” retaliation. The Global Times (a Chinese state-run newspaper) said: “It is necessary for China to retaliate against the UK, otherwise would we not be seen as easy to bully. Such retaliation should be public and painful for the UK”.

With the UK exporting around £30 billion to China each year and importing around £50 billion from China, there are concerns over the potential for China to ignite a trade war. Additionally, China invested around £8 billion in the UK economy as of last year and there are fears that these investments could be dramatically cut. For now, traders wait to see what course Chinese retaliation will take, if it does decide to take such action.

Technical Views

GBPCNH (Bullish above 8.6756)

From a technical viewpoint. GBPCNH continues to trade towards the upper part of the 8.6756 – 8.8455 range with the latter level holding as resistance again this week. Bias remains skewed to the upside here, looking for an eventual break and a challenge of higher resistance at the 8.9126 level, with the bearish trend line from 2019 highs coming in around that price also. To the downside, any break below the 8.6756 level will put focus on the 8.5944 level next.

UK/China Rift Growing As UK Bans Huawei

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