RUTHFULLY YOURS

The furious reaction from Beijing reveals how explosive the legislation has become. The People’s Daily called it a charter for rioters and criminals.

Chinese Foreign Minister Wang Yi called it a blatant interference in China’s internal affairs. “Some politicians in the US are now smearing, attacking, slandering China to a level close to madness,” he said.

The rhetorical tit-for-tat escalated on Thursday as US Senate majority leader Chuck Schumer lashed out at President Xi Jinping by name. “This resolution is what America thinks of you and your policies towards the people in Hong Kong and  towards the Uighurs, and your oppressive rule throughout. Don’t take any word of the (US) President that everything’s okay. It is not,” he said.

The text says the US Secretary of State must certify within six months whether Hong Kong’s government is in compliance with the ‘one nation, two systems’ model established by the Basic Law after Britain’s handover in 1997, and whether it remains sufficiently ‘autonomous’ to warrant a US exemption.

Hong Kong will be under the microscope on judicial independence, police conduct, sedition laws, freedom of the press, the internet, and social media, as well as education, progress towards universal suffrage, and whether it is upholding international human rights law.

The enclave will be probed for possible breaches of US sanctions law, and whether it is involved in mass surveillance activities and China’s “social credit system”, specifically whether it is passing on Sharp Eyes technology, Skynet (facial recognition) and the Integrated Joint Operations Platform in breach of US controls. The bill includes a clause condemning the harassment of democracy activists within China. This ups the ante further.

Recent developments within China have raised the risk of a showdown. The Party’s Central Committee decided three weeks ago – in principle – that Chinese national security law and “patriotic education” in schools should extend to Hong Kong. The People’s Congress then asserted constitutional supremacy over the enclave’s courts in interpreting the Basic Law.

The dispute has rattled markets but may not alter the outcome of the proposed Phase One trade deal. The talks have run into difficulties for other reasons. “The Chinese have decided over the last couple of months that Trump needs a deal and they are moving the goal posts. They want more tariffs removed,” said Mr Reinsch, now at the Centre for Strategic and International Studies.

Mr Trump has imposed tariffs of various levels on $550bn of Chinese goods, covering the bulk of the country’s exports. He has suspended a further rise in the punitive rates and hinted at a roll-back on a set of consumer goods worth $112bn imposed in September. That may not be enough.

Beijing is demanding a broader roll-back, and is emboldened after seeing off White House demands for a fundamental overhaul of its economic and industrial system – which would threaten the Communist Party’s nexus of patronage and control.

“Apparently there is nothing in the deal on Chinese subsidies or on the role of the state-owned entities, and these were the two biggest structural issues. The assurances on intellectual property theft are not much different from what they told Obama,” said Mr Reinsch.

The Chinese are trying to crack down anyway on IP piracy because it is holding back their own economy. Over 95pc of the cases in the new IP tribunals are complaints by one Chinese firm against another.

“I think Trump is going to declare a great victory anyway and do a deal. But he does not want it too soon because it risks falling apart over the next year as people discover all its deficiencies, which are not hard to find, and allows the Democrats to say that he has done great damage and achieved nothing in the end,” he said.

For now Chinese negotiators are keeping a line open to Washington. Economic plenipotentiary Liu He has invited top US officials to Beijing for a fresh round of face-to-face talks to break the deadlock.

Mr Trump is being coy, tweeting that the Chinese want a deal but he is waiting for better terms:  “I don’t think they’re stepping up to the level that I want.”

Traders and investors are no longer hyper-sensitive to these tweets. The currency has been debased by over-issuance. The constant shifting back and forth has created a pervasive mood of weariness.

The Hong Kong bill leaves the enclave in a precarious situation. A Sword of Damocles will now hang over the  government as it goes through the grim ritual of US certification every year. If special status is suspended, the hub’s banking system and capital markets lose unfettered access to the dollarised financial system. Its role as “Asia’s World City” becomes untenable as firms switch to Singapore.

The US dollar exchange peg is vulnerable if capital flights starts in earnest and investors start to doubt whether the Hong Kong Monetary Authority can count on dollar swap lines from the US Federal Reserves in a banking crisis.

This could crystallize trouble in the credit markets. Hong Kong is sitting on the world’s most overheated property market. The stakes are huge.