Hong Kong, A Victim Under Cross-fire

April 15, 2001

 

President Bush seems to be rebuilding US military power, reversing what Clinton did in his past 8 years. To do that, he needs to create an enemy target, and China is an obvious
choice.

On April 1, 2001, a US spy plane EP-3 collided with a Chinese fighter off the coast of Hainan Island.  The Chinese fighter crashed into the sea and its pilot is still missing and presumed dead. After 11 days of tough negotiation, US finally expressed “very sorry” to the death of the Chinese pilot and for the landing of the EP-3 on Hainan Island without verbal permission from the Chinese authorities (although the US crew has a different version that May-Day calls were given 15 times). Based on this ‘apology’, interpreted differently by the two sides, the 24 crew members were released by the Chinese side for humanitarian reasons, but the sensitive spy plane and its sophisticated equipment have not been returned. Immediately after the return of the crew members, the tone of the US administration was toughened, pressing on canceling “Most Flavored Nation” status for China, objection of China hosting 2008 Olympic and entry to WTO, increasing arm sales to Taiwan including the sensitive Aegis, and other ‘human rights’ issues such as Tiananmen Square, Falungong, Tibetan independence. 

 

Judging from the Chinese reaction, this is unlikely to be settled soon. However, the annual MFN issue is creeping up, and has to be settled by May. During the Clinton administration, the US Senate majority was against giving China the MFN status, but Clinton used his veto power to push it through. The Senate being short of a 2/3 majority to over rule the president's veto had to watch China continue the MFN status in the past 8 years. The situation is a bit strange this time around. The ‘human rights’ active Democrats and the hawkish Republicans together may win over the trade-sensitive elements.  If president Bush used MFN as the bargaining chip for the return of the spy plane, this may further jeopardize the relationship of the two countries. HSI could be the victim of the power struggle and break the bottom of 13,000.

A strong sense of sudden political and economic changes is an important requirement for international investment. One must constantly adjust to new situations. Investors should be cautious that under the current circumstances, the up side possibility for HSI is limited, but the down side risk is high.