MNI EXCLUSIVE: China To Try To Limit HK Hit To Growth,US Trade

--U.S. Reaction To HK Move Likely Modest, Source Says

--China Keen To Avoid Economic Damage From Diplomatic Spat

     BEIJING(MNI) - The U.S. may impose travel restrictions on some Chinese

officials but is unlikely to revoke Hong Kong's special trade status this year

in response to China's move to tighten controls over the territory, a source

close to the Chinese government said, as policy advisors told MNI that Beijing

will try to limit any resulting damage to its economy and already strained trade

relations with Washington.

     While U.S. Secretary of State Mike Pompeo has warned that Hong Kong faces

the loss of trade privileges, the government source noted that the annual review

of its special status will be concluded by Jul. 1, before the National People's

Congress is likely to approve the final draft of a law extending Chinese

national security laws to the territory the following month. In the short term,

the U.S. is more likely to react by targeting officials with sanctions, the

source said.

     Any U.S. action against Hong Kong will also affect U.S. multinationals and

trading companies, which use it as a low-tax base free of export restrictions

affecting the Chinese mainland, the source added.

     "if Washington moves to change the special trade status of Hong Kong, the

U.S. should bear the biggest cost," the source said. Another source close to

policymaking circles agreed, although adding that China-U.S. relations may now

be steadying after a period of decline. The source pointed to what they

described as a slightly softened stance by Foreign Minister Wang Yi at a news

conference on Sunday, in which he indicated that China would be open to

cooperating in tracing the origin of the coronavirus.

     In a similar vein, policy advisors told MNI that any further U.S. moves

against Chinese technology companies are likely to meet with a restrained

response as Beijing concentrates on economic recovery.

     --UNRELIABLE ENTITIES

     "If China took the initiative or took reciprocal actions to respond to U.S.

actions, China itself will be damaged and so would the global technology supply

chain. No one would benefit from this ... The current focus for China is to

ensure the continuous growth of the economy," said Zhao Hai, a research fellow

at the Institute of World Economics and Politics, Chinese Academy of Social

Sciences.

     While other policy advisors including Shi Yinhong, a professor at Renmin

University and advisor to the government, said that China may launch a list of

unreliable entities, and include some U.S. technology firms, in response to

Washington's moves against telecommunications giant Huawei, they added that the

negative effect on the companies would be limited.

     "Imposing additional tariffs on U.S. goods or taking aim at U.S. companies

in China would go against the government's policies of encouraging foreign

investment and protecting foreign companies' interests. These measures are also

not in line with the current economic situation and demands for technology,"

said Shi.

     But, while seeking to avoid any deepening of ruptures with Washington,

China may also over the longer term increasingly seek to develop its own

technologies, with increased high-tech cooperation with Japan and South Korea

offering potential for more integrated regional trade networks safer from U.S.

interference, Zhao said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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