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Last week, I mentioned that a return of last year's clash with China was a wildcard that could upset the markets.
Well, China has gone ahead and put my words to the test.
On May 21, China announced that it would impose a draconian new security law over Hong Kong, the largely democratic and self-governed Chinese city.
You might remember that when Hong Kong's pro-Chinese government tried to do something similar last year, the demonstrations there brought the city to a standstill. Because Hong Kong has long been a center of Asian trade and finance, the costs to China were huge, both in terms of lost money and loss of face.
From March through the end of the year, the people of Hong Kong made it clear they would not accept a takeover by China's ruling Communist Party. The Hong Kong government retreated, and the matter disappeared as the COVID-19 pandemic started spreading.
Well, now China is trying it again. This time, they're not even pretending that Hong Kong's local government is in charge.
On Tuesday of this week, the market didn't show much reaction. The Reality Gap between the mild market reaction and the potential ramifications from an escalation in confrontation over Hong Kong has started to come into full view. The White House's announcement about a news conference on China sent the markets down 350 Dow points yesterday afternoon. And trading is muted Friday morning as traders are showing concern over how aggressive China is getting and what U.S. foreign policy and trade reactions could be. Hong Kong is just the tip of the iceberg.
And it's not about to stop. The effects on Chinese stocks could be huge...
China Is Now Openly the Neighborhood Bully
For the past two weeks or so, China has been picking fights with almost everyone it can.
On May 21, China's government announced that it was drafting a law that would make "secession, foreign interference, terrorism and subversion against" China's Communist government illegal in Hong Kong.
This is the first time China's central government has tried to impose something like this on Hong Kong. In the past, they at least pretended to respect Hong Kong's "special status" as an autonomous part of China.
The Wall Street Journal called this move "the nuclear option."
Three days earlier, China had made sure one of its proxies was re-elected in Hong Kong by removing everyone who would vote against him from the city's legislature.
The people behind last year's successful anti-China protests in Hong Kong are already gathering supporters. But with Hong Kong still under COVID-19 restrictions and many people fearing the return of the virus, it's much harder to convince the people of Hong Kong to get out into the streets.
As serious and aggressive as this takeover of Hong Kong is, it's not the only fight China is picking right now.
In the past few weeks China's President, Xi Jinping, sent his Coast Guard to ram into and sink a Vietnamese fishing boat, as well as surround a Malaysian offshore oil rig. Both events happened in waters China considers to be theirs, despite the waters being closer to other countries and an international court ruling that China has no claim.
In the Himalayas, President Xi has sent military reinforcements to the disputed border with India. Chinese soldiers there had gotten into fights with their Indian counterparts, leaving people on both sides bloodied and hurt.
Meanwhile, China's allies in Nepal's government have suddenly accused India of stealing territory, also in the Himalayas.
Earlier in May, the prime minister of India's other big neighbor, Pakistan, declared that India is thinking of launching a terrorist attack on itself and blaming Pakistan.
Mind you, Pakistan is a Chinese ally with a long history of supporting or at least not stopping Pakistani terrorists that plan attacks against India.
If anything, this announcement seems more of a threat of an impending strike against India than anything else.
Unfortunately, the ability of India, Vietnam, Malaysia, and other countries to resist China's aggression right now is small. They're all focused on defeating the COVID-19 pandemic that first started in China.
So is the rest of the world.
President Trump has been blaming China more and more over the country's early cover up of the COVID-19 pandemic, and has been imposing more and more sanctions on Chinese tech firms. The White House is also seemingly in support of a Senate bill that would require all foreign stocks listed on American stock exchanges to be audited and show that they are not under the control of a foreign government.
China itself has said that this would drive many Chinese companies away from U.S markets. It's safe to assume this is because any audit would show that many of them work very closely with the Chinese government.
In response, China has ratcheted up its rhetoric and is taking a tougher stance. It has threatened to sanction American tech firms working in China and said it would "take countermeasures" if the U.S. tried to interfere with Hong Kong.
The one bright spot is that Chinese officials have said they continue to abide by the Phase One trade deal that President Trump signed with China in January.
Even this long list of recent Chinese aggression isn't complete.
For example, China just started a trade dispute with Australia, and for the first time since 2013 removed the word "peaceful" from its annual report on how to take over Taiwan, which China considers a breakaway province.
Mind you, Taiwan is a close American ally. Any non-peaceful attempt to take Taiwan would probably lead to war with the U.S.
All in all, it's clear that China's President Xi Jinping has come out of the country's COVID-19 crisis more belligerent to the outside world.
Here's why - and why he's not about to stop...
The West Is All Bark, No Bite - and China has Little Left to Lose
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.