India hikes US tariffs after losing preferential trade Access

Spat casts shadow over security relationship designed to counter Chinese influence

Stephanie Findlay in New Delhi


Indian prime minister Narendra Modi, left, with US president Donald Trump during a visit to Washington in 2017 © AP


India has raised tariffs on US goods in retaliation for Washington’s decision to strip New Delhi of preferential access to the US market.

The increase in tariffs on more than 20 types of goods including almonds, apples and walnuts, took effect on June 16, said India’s commerce ministry.

The trade spat has cast a shadow over the deepening India-US security relationship, designed to counter China’s economic and military influence in the region.

US secretary of state Mike Pompeo is scheduled to hold talks in New Delhi with his Indian counterpart Subrahmanyam Jaishankar ahead of the G20 summit in Japan this month, where US president Donald Trump and India’s prime minister Narendra Modi are expected to meet.

US-India bilateral trade reached $142bn in 2018, a seven-fold increase since 2001, according to the US state department. But Mr Trump has repeatedly criticised India’s protectionist policies, describing its tariffs on goods such as Harley-Davidson motorcycles as unfair.

New Delhi’s loss of privileges under Washington’s generalised system of preferences (GSP) — a programme to aid the economies of less developed countries — will hit about $6bn worth of Indian goods previously imported into the US duty-free.

India’s commerce ministry has called the US decision “unfortunate” and had said it wanted to find a “mutually acceptable way forward”. New Delhi proposed higher tariffs last year following the US announcement that it would not grant India a waiver when it increased its steel and aluminium tariffs, but decided not to do so until losing its preferential trade status.

India’s recent efforts to regulate ecommerce titans Amazon and Walmart-owned Flipkart have aggravated tension, with US companies complaining that they were surprised by the new rules.

There is also tension over the Trump administration’s threat to impose sanctions on India if it purchases oil from Iran and if it proceeds with its planned acquisition of Russian S-400 anti-aircraft missiles.

Earlier this week, Mr Pompeo appeared open to discussing India’s preferential trade status. “We’ll probably discuss the recent decision on the GSP programme,” Mr Pompeo said, adding that he hoped “India will drop their trade barriers and trust in the competitiveness of their own companies, their own businesses, their own people and private sector companies.”

C Raja Mohan, director of the Institute of South Asian Studies at the National University of Singapore, said it was now a question of finding the middle ground. “If you are a pessimist, this is the beginning of a trade war between India and the US,” he said.

“If you are an optimist, India’s tariff retaliation sets the stage for a serious negotiation between Delhi and Washington on trade issues and a new framework to transform the commercial partnership and reinforce the security ties.

“Pompeo’s talk in Delhi and Modi’s visit to the Osaka G20 should tell us who might prevail: pessimists or optimists.”


Q1 2019 Z.1 "Flow of Funds"

 Doug Nolan


Total Non-Financial Debt (NFD) expanded (nominal) $721 billion (strongest growth since Q2 ’18) during the quarter to a record $52.579 TN. NFD expanded $2.504 TN, or 5.0%, year-on-year. For perspective, annual NFD growth averaged $1.602 TN over the decade 2008-2017.

NFD expanded $2.432 TN in 2006 and $2.478 TN in 2007. NFD has now expanded $17.514 TN, or 50%, since the end of 2008.

Financial sector debt expanded $127 billion during the quarter ($368bn y-o-y) to $16.444 TN, and Foreign U.S. borrowings increased $130 billion ($88bn y-o-y) to $4.051 TN. Total (NFD, Financial and Foreign) System debt expanded $978 billion during the quarter to a record $73.073 TN. Going all the way back to Q4 2017, Q1’s system-wide Credit expansion was second only to Q1 ‘18’s $1.002 TN.

Total Credit grew at a 5.6% rate during the quarter, up from Q4’s 2.72% to the strongest pace since Q1 2018’s 6.51%. Federal government borrowings jumped to an 8.57% rate, up from Q4’s 2.50% to the strongest pace since Q1 ‘18’s 13.38%. Total Corporate borrowings accelerated to a 6.62% pace, up from Q4’s 3.88% to the strongest rate since Q2 2017. Non-financial Corporate borrowings jumped to a 7.58% pace (from Q4’s 3.35%), the briskest rate since Q1 2016. Total Household Borrowings slowed to a 2.33% pace (from Q4’s 2.82%), with Household Mortgages and Consumer Credit expanding 2.43% and 4.34%. The Domestic Financial Sector increased borrowings at a 3.28% pace, up from Q4’s 2.71%.

In seasonally-adjusted and annualized rates (SAAR), total system Credit expanded $2.884 TN during Q1, double Q1 to the strongest pace since Q1 2018’s SAAR $3.207 TN. Federal borrowings surged SAAR $1.531 TN (up from Q4’s SAAR $444bn). Total Corporate borrowings expanded SAAR $1.014 TN, the strongest since Q1 2016’s SAAR $1.150 TN.

Household borrowings grew SAAR $363 billion (mortgage SAAR $252bn, Consumer Credit SAAR $174bn), the weakest pace since Q1 2016’s SAAR $334 billion. Financial Sector debt expanded SAAR $535 billion, the strongest rate since Q3 2016’s SAAR $557 billion.

Q1 Federal Expenditures were up 5.9% y-o-y to SAAR $4.659 TN, while Federal Receipts increased 3.9% y-o-y to $3.564 TN. State & Local Expenditures were up 2.4% y-o-y to SAAR $2.862 TN, with Receipts up 3.0% to $2.641 TN.

Bank (“Private Depository Institutions”) Assets rose nominal $103 billion during the quarter to a record $19.296 TN. For Q1, Loans were little changed at $11.270 TN, while Debt Securities jumped $83.3 billion to a record $4.384 TN. Over four quarters, Loans expanded $535 billion, or 5.0%, while Debt Securities expanded $167 billion, or 4.0%.

Broker/Dealer Assets slipped $5.6 billion during the quarter to $3.353 TN. Over four quarters, Broker/Dealer Assets gained $262 billion, or 8.5%. It appears growth was isolated in off-balances sheet vehicles (also helping to explain Q1’s tepid bank Loan growth). Wall Street “Funding Corps” jumped $88 billion during Q1 (SAAR $255bn!) to $1.518 TN. Fed Funds & Repo surged $136 billion to $4.032 TN, the high since Q4 2012. Fed Funds & Repo jumped $538 billion, or 15.4% over the past year.

Money Market Fund Assets gained $41 billion during Q1 to $3.079 TN (high since Q4 ’09), with a four-quarter gain of $286 billion, or 10.2%.

Retail sales have bounced back over recent months, recovering from a weak start to 2019 and poor end to 2018. It’s not surprising that household spending tracks the fortunes of the bloated Household Balance Sheet. Household (& Non-Profits) Assets surged $4.697 TN during Q1 to a record $124.694 TN. And with Liabilities expanding just $5.9 billion, Household Net Worth surged $4.691 TN – the strongest ever quarterly increase in Net Worth (2nd place Q4 ‘99’s $3.114 TN). Household Net Worth jumped to 516% of GDP, just below the record 522% from Q3 2018. This compares to peak ratios of 484% in Q1 2007 and 444% during Q1 2000.

On the back of the strong recovery in stock prices, Household Financial Asset holdings surged $4.238 TN to a record $88.895 TN, or 422% of GDP. This ratio compares to peaks 379% during Q3 2017 and 359% during Q1 2000. Financial Assets were up $3.218 TN over the past four quarters. House price inflation continues to boost household perceived wealth. Household Real Estate holdings rose $387 billion during the quarter to a record $29.551 TN, with a four-quarter gain of $1.263 TN.

Rest of World (ROW) also benefitted from the big Q1 equities recovery. ROW holdings of U.S. assets jumped $1.372 TN during the quarter – the largest ever quarterly gain - to a record $28.570 TN. ROW holdings have almost doubled since the cycle peak $14.705 TN back in Q1 2008. Over this period, ROW holdings jumped from 100% to 136% of GDP. ROW Equities (Equities and Mutual Funds) rose $838 billion during the quarter to a record $8.187 TN. Debt Securities rose $381 billion (strongest gain since Q3 2010) to a record $11.548 TN, led by a $208 billion increase in Treasuries holdings (to $6.474 TN).

The market now prices in a 21% probability of a rate cut at next week’s FOMC meeting, with an 86% probability for a cut by the July 31st meeting. I have previously addressed the unprecedented nature of commencing a Fed easing cycle with the unemployment rate at 3.6%, financial conditions loose and stocks near all-time highs. Add to this list system Credit expansion near the strongest in a decade. It’s incredible that the Fed would reduce rates in the current backdrop, but markets are sure trying to force the Fed’s hands. That highly speculative markets have come to have such sway over the Fed (and global central bankers) is indicative of the precarious nature of late-cycle market and policy dynamics.

The predicament is illuminated rather poignantly in Z.1 data. When “risk off” took hold during Q4, Non-Financial Debt growth dropped to SAAR $1.404 TN from Q3’s SAAR $2.300 TN. In short, that’s insufficient new Credit to sustain financial and economic Bubbles. Net Issuance of Debt Securities sank from Q3’s SAAR $1.808 TN to Q4’s SAAR $412 billion – with Corporate & Foreign Bonds sinking from SAAR $411 billion to SAAR negative $125 billion.

But the Fed’s January 4th dovish U-turn opened the “risk on” floodgates. Debt Securities expanded SAAR $1.783 TN in Q1, with Corporate & Foreign Bonds expanding SAAR $588 billion. Loose financial conditions powered equities higher, ensuring rapidly inflating Household Net Worth. After suffering a record $3.960 TN quarterly drop during Q4, Household Net Worth jumped a quarterly record $4.691 TN during Q1.

Systems have become acutely unstable. Market-based Credit so dominates system Credit that “risk on”/“risk off” speculative dynamics now exert an acutely destabilizing impact on financial conditions, Credit expansion, securities prices, Household Net Worth and economic performance. In this highly speculative market environment, “risk on” ensures loose financial conditions, Credit and speculative excess and vigorous market inflation, while exacerbating economic maladjustment.

When “risk on” invariably succumbs to “risk off,” financial conditions abruptly tighten, debt issuance tanks, system Credit growth drops sharply, markets turn illiquid, Bubbles falter, equities prices sink, Household Net Worth deflates, and the Bubble Economy commences a downward spiral. Worse yet, these dynamics are a global phenomenon.

Is the Fed really about to further feed “risk on”, stoking Bubble excess in the process? I’ll assume the Powell Fed would rather sit this one out. They are, of course, ready to respond in the event of “risk off.” But at this speculative blow-off Bubble phase, things tend to unwind really quickly. Global bonds appreciate the acute fragility and are priced for rate cuts and aggressive QE deployment.

The global yield collapse is not so much in response to economic weakness and trade war risks.

The global financial system is an accident in the making. China is an accident in the making.

Markets are demanding: “Give us rate cuts and prepare for aggressive QE - or we’ll give you central bankers the type of vicious market accident you are not prepared to contend with!” The Fed is faced with the Hobson Choice of either stoking the Bubble or waiting for incipient “risk off” - and hoping it possesses the firepower to hold things together. Markets bet confidently the Fed lacks the fortitude to wait.

How the long debt cycle might end

Some fear the fire of inflation; others the ice of deflation

Martin Wolf




Some say the world will end in fire, Some say in ice.” These brilliant lines by the poet Robert Frost capture the world’s possible economic prospects.

Some warn that the world of high debt and low interest rates will end in the fire of inflation. Others prophesy that it will end in the ice of deflation. Others, such as Ray Dalio of Bridgewater, are more optimistic: the economy will be neither burnt nor frozen. Instead, it will be neither too hot nor too cold, like the baby bear’s porridge, at least in countries that have had the fortune and wit to borrow in currencies they create freely.

William White, former chief economist of the Bank for International Settlements, presciently warned of financial risks before the 2007-09 financial crisis. Last year, he warned of another crisis, pointing to the continuing rise in non-financial sector debt, especially of governments in high-income countries and corporations in high-income and emerging economies. Those in emerging countries are particularly vulnerable, because much of their borrowing is in foreign currencies. This causes currency mismatches in their balance sheets. Meanwhile, monetary policy fosters risk-taking, while regulation discourages it — a recipe for instability.



Start then with inflationary fire. Much of what is going on right now recalls the early 1970s: an amoral US president (then Richard Nixon) determined to achieve re-election, pressured the Federal Reserve chairman (then Arthur Burns) to deliver an economic boom. He also launched a trade war, via devaluation and protection. A decade of global disorder ensued. This sounds rather familiar, does it not?

In the late 1960s, few expected the inflation of the 1970s. Similarly, a long period of stable and low inflation has calmed fears of an upsurge, even though unemployment has fallen to low levels. (In the US, it is at its lowest level since 1969.) Some suggest that the Phillips curve — the short-term relationship between unemployment and inflation — is dead, because low unemployment has not raised inflation. More likely, it is sleeping. Inflation expectations may now be anchored. But a strong surge of demand might still sweep them away.



In some ways, a rise in inflation would be helpful. A sudden jump in inflation would reduce debt overhangs, notably of public debt, just as the inflation of the 1970s did. Moreover, central banks know what to do in response to a surge in inflation. Yet higher inflation would also lead to a rise in long-term nominal interest rates, which tend to front-load the real burden of debt service. Short-term rates would also jump as they did in the early 1980s. Risk premia would rise. High-flying stock markets might collapse. Labour relations would become more strife-prone, as would politics. This disarray would hit unevenly, causing currency disorder. The loss of confidence in public institutions, notably central banks, would be severe. In the end, the likely stagflation would end in severe recession, as in the 1980s.

Now turn to deflationary ice. This might begin with a sharp negative economic shock: a worsening trade war, a war in the Middle East or a crisis in private or public finance, possibly in the eurozone, where the central bank is relatively constrained. The result could be a deep recession, even a lurch into deflation, so worsening the debt overhang.




The big difficulty would be knowing how to respond given that interest rates are already so low. Conventional policy (lower short-term rates) and conventional unconventional policy (asset purchases) might be insufficient.

A range of other possibilities exist: negative rates from the central bank; lending to banks at lower rates than the central bank pays on their deposits; purchase of a much wider range of assets, including foreign currencies; monetisation of fiscal deficits; and “helicopter drops” of money. Much of this would be technically or politically problematic, and would require close co-operation with the government. Meanwhile, if governments acted too slowly (or not at all) a depression might ensue, as in the 1930s, via mass bankruptcy and debt deflation. Many fools recommended that in 2008.



Yet none of these disasters is at all inevitable. They would be chosen catastrophes. As Mr Dalio argues, a golden mean is possible. Fiscal and monetary policy would then co-operate to generate non-inflationary growth. Changes in fiscal incentives would discourage debt and encourage equity. Government policy would shift income towards spenders, reducing our current reliance on debt-fuelled asset bubbles for sustaining demand. Still more debt would be moved out of the balance sheets of financial intermediaries directly on to the balance sheets of households.

Even if real interest rates rose, perhaps because productivity growth strengthened durably, the impact of robust non-inflationary growth on the debt burden would almost certainly outweigh a move to somewhat higher interest rates. We would, above all, be moving out of “secular stagnation” into something less bad. That shift might be tricky. But it would be to a better world.





It is not necessary to repeat the mistakes of either the 1930s or the 1970s. But we have made enough mistakes already and are, collectively, making enough more right now to risk either outcome, possibly both.

A breakdown of the global economic and political order seems conceivable. The impact on our debt-encumbered world economy and increasingly fraught global politics is impossible to calculate. But it could be horrendous. Above all, nationalistic strongmen would be unable to co-operate if things went seriously wrong, as they might, perhaps even soon.

That is the most worrying feature of our world.

The Growing Risk of a 2020 Recession and Crisis

Across the advanced economies, monetary and fiscal policymakers lack the tools needed to respond to another major downturn and financial crisis. Worse, while the world no longer needs to worry about a hawkish US Federal Reserve strangling growth, it now has an even bigger problem on its hands.

Nouriel Roubini

roubini129_DNY59GettyImages_benjamincashhourglass


NEW YORK – Last summer, my colleague Brunello Rosa and I identified ten potential downside risks that could trigger a US and global recession in 2020. Nine of them are still in play today.

Across the advanced economies, monetary and fiscal policymakers lack the tools needed to respond to another major downturn and financial crisis. Worse, while the world no longer needs to worry about a hawkish US Federal Reserve strangling growth, it now has an even bigger problem on its hands.

Many involve the United States. Trade wars with China and other countries, along with restrictions on migration, foreign direct investment, and technology transfers, could have profound implications for global supply chains, raising the threat of stagflation (slowing growth alongside rising inflation). And the risk of a US growth slowdown has become more acute now that the stimulus from the 2017 tax legislation has run its course.

Meanwhile, US equity markets have remained frothy since our initial commentary. And there are added risks associated with the rise of newer forms of debt, including in many emerging markets, where much borrowing is denominated in foreign currencies. With central banks’ ability to serve as lenders of last resort increasingly constrained, illiquid financial markets are vulnerable to “flash crashes” and other disruptions. One such disruption could come from US President Donald Trump, who may be tempted to create a foreign-policy crisis (“wag the dog”) with a country like Iran. That might bolster his domestic poll numbers, but it could also trigger an oil shock.

Beyond the US, the fragility of growth in debt-ridden China and some other emerging markets remains a concern, as do economic, policy, financial, and political risks in Europe. Worse, across the advanced economies, the policy toolbox for responding to a crisis remains limited.

The monetary and fiscal interventions and private-sector backstops used after the 2008 financial crisis simply cannot be deployed to the same effect today.

The tenth factor that we considered was the US Federal Reserve’s interest-rate policy. After hiking rates in response to the Trump administration’s pro-cyclical fiscal stimulus, the Fed reversed course in January. Looking ahead, the Fed and other major central banks are more likely to cut rates to manage various shocks to the global economy.

While trade wars and potential oil spikes constitute a supply-side risk, they also threaten aggregate demand and thus consumption growth, because tariffs and higher fuel prices reduce disposable income. With so much uncertainty, companies will likely opt to reduce capital spending and investment.

Under these conditions, a severe enough shock could usher in a global recession, even if central banks respond rapidly. After all, in 2007-2009, the Fed and other central banks reacted aggressively to the shocks that triggered the global financial crisis, but they did not avert the “Great Recession.” Today, the Fed is starting with a benchmark policy rate of 2.25-2.5%, compared to 5.25% in September 2007. In Europe and Japan, central banks are already in negative-rate territory, and will face limits on how much further below the zero bound they can go. And with bloated balance sheets from successive rounds of quantitative easing (QE), central banks would face similar constraints if they were to return to large-scale asset purchases.

On the fiscal side, most advanced economies have even higher deficits and more public debt today than before the global financial crisis, leaving little room for stimulus spending. And, as Rosa and I argued last year, “financial-sector bailouts will be intolerable in countries with resurgent populist movements and near-insolvent governments.”

Among the risks that could trigger a recession in 2020, the Sino-American trade and technology war deserves special attention. The conflict could escalate further in several ways. The Trump administration could decide to extend tariffs to the $300 billion worth of Chinese exports not yet affected. Or prohibiting Huawei and other Chinese firms from using US components could trigger a full-scale process of de-globalization, as companies scramble to secure their supply chains. Were that to happen, China would have several options for retaliating against the US, such as by closing its market to US multinationals like Apple.

Under such a scenario, the shock to markets around the world would be sufficient to bring on a global crisis, regardless of what the major central banks do. With the current tensions already denting business, consumer, and investor confidence and slowing global growth, further escalation would tip the world into a recession. And, given the scale of private and public debt, another financial crisis would likely follow from that.

Both Trump and Chinese President Xi Jinping know that it is in their countries’ interest to avoid a global crisis, so they have an incentive to find a compromise in the next few months. Yet both sides are still ratcheting up nationalist rhetoric and pursuing tit-for-tat measures. Trump and Xi each seem to think that his country’s long-term economic and national security may depend on his not blinking in the face of a new cold war. And if they each genuinely believe the other will blink first, the risk of a ruinous clash is high indeed.

It is possible that Trump and Xi will meet for talks during the G20 summit on June 28-29 in Osaka. But even if they do agree to restart negotiations, a comprehensive deal to settle their many points of contention would be a long way off. As the two sides drift further apart, the space for compromise is shrinking, and the risk of a global recession and crisis in an already fragile global economy is rising.


Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House's Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

People v power

The rule of law in Hong Kong

Huge demonstrations have rattled the territory’s government—and the leadership in Beijing























THREE THINGS stand out about the protesters who rocked Hong Kong this week. There were a great many of them. Hundreds of thousands took to the streets in what may have been the biggest demonstration since Hong Kong was handed back to China in 1997. Most of them were young—too young to be nostalgic about British rule. Their unhappiness at Beijing’s heavy hand was entirely their own. And they showed remarkable courage. Since the “Umbrella Movement” of 2014, the Communist Party has been making clear that it will tolerate no more insubordination—and yet three days later demonstrators braved rubber bullets, tear gas and legal retribution to make their point. All these things are evidence that, as many Hong Kongers see it, nothing less than the future of their city is at stake.

On the face of it, the protests were about something narrow and technical. Under the law, a Hong Kong resident who allegedly murdered his girlfriend in Taiwan last year cannot be sent back there for trial. Hong Kong’s government has therefore proposed to allow the extradition of suspects to Taiwan—and to any country with which there is no extradition agreement, including the Chinese mainland.

However, the implications could not be more profound. The colonial-era drafters of Hong Kong’s current law excluded the mainland from extradition because its courts could not be trusted to deliver impartial justice. With the threat of extradition, anyone in Hong Kong becomes subject to the vagaries of the Chinese legal system, in which the rule of law ranks below the rule of the party. Dissidents taking on Beijing may be sent to face harsh treatment in the Chinese courts. Businesspeople risk a well-connected Chinese competitor finding a way to drag them into an easily manipulated jurisdiction.

That could be disastrous for Hong Kong, a fragile bridge between a one-party state and the freedoms of global commerce. Many firms choose Hong Kong because it is well-connected with China’s huge market, but also upholds the same transparent rules that govern economies in the West. Thanks to mainland China, Hong Kong is the world’s eighth-largest exporter of goods and home to the world’s fourth-largest stockmarket. Yet its huge banking system is seamlessly connected to the West and its currency is pegged to the dollar. For many global firms, Hong Kong is both a gateway to the Chinese market and central to the Asian continent—more than 1,300 of them have their regional headquarters there. If Hong Kong came to be seen as just another Chinese city, Hong Kongers would not be the only ones to suffer.

The threat is real. Since he took over as China’s leader in 2012, Xi Jinping has been making it clearer than ever that the legal system should be under the party’s thumb. China must “absolutely not follow the Western road of ‘judicial independence’,” he said in a speech published in February. In 2015 Mr Xi launched a campaign to silence independent lawyers and civil-rights activists. Hundreds of them have been harassed or detained by the police. The authorities on the mainland have even sent thugs to other jurisdictions to abduct people, including a publisher of gossipy books about the party, snatched from a car park in Hong Kong and a tycoon taken from the Four Seasons hotel in 2017. The message is plain. Mr Xi not only cares little for the rule of law on the Chinese mainland. He scorns it elsewhere, too.

The Hong Kong government says the new law has safeguards. But the protesters are right to dismiss them. In theory extradition should not apply in political cases, and cover only crimes that would incur heavy sentences. But the party has a long record of punishing its critics by charging them with offences that do not appear political. Hong Kong’s government says it has reduced the number of white-collar offences that will be covered. But blackmail and fraud still count. It has said that only extradition requests made by China’s highest judicial officials will be considered. But the decision will fall to Hong Kong’s chief executive. That person, currently Carrie Lam, is chosen by party loyalists in Hong Kong and answers to the party in Beijing. Local courts will have little room to object. The bill could throttle Hong Kong’s freedoms by raising the possibility that the party’s critics could be bundled over the border.

It is a perilous moment. The protests have turned violent—possibly more violent than any since the anti-colonial demonstrations in 1967. Officials in Beijing have condemned them as a foreign plot. Ms Lam has been digging in her heels. But it is not too late for her to think again.

In its narrowest sense, the new law will not accomplish what she wants. Taiwan has said that it will not accept the suspect’s extradition under the new law. Less explosive solutions have been suggested, including letting Hong Kong’s courts try cases involving murder committed elsewhere. Anti-subversion legislation was left to languish after protests in 2003. There is talk that the government may see this as the moment to push through that long-shelved law. Instead Ms Lam should take it as a precedent for her extradition reform.

The rest of the world can encourage her. Britain, which signed a treaty guaranteeing that Hong Kong’s way of life will remain unchanged until at least 2047, has a particular duty. Its government has expressed concern about the “potential effects” of the new law, but it should say loud and clear that it is wrong. With America, caught up in a trade war with China, there is a risk that Hong Kong becomes the focus of a great-power clash. Some American politicians have warned that the law could jeopardise the special status the United States affords the territory. They should be prudent. Cutting off Hong Kong would not only harm American interests in the territory but also wreck the prospects of Hong Kongers—an odd way to reward its would-be democrats. Better to press the central government, or threaten case-by-case scrutiny of American extraditions to Hong Kong.

But would this have any effect? That is a hard question, because it depends on Mr Xi. China has paid dearly for its attempts to squeeze Hong Kong. Each time the world sees how its intransigence and thuggishness is at odds with the image of harmony it wants to project. When Hong Kong passed into Chinese rule 22 years ago, the idea was that the two systems would grow together. As the protesters have made clear, that is not going to plan.