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| Asian financial crisis, SARS, global financial crisis, COVID-19 outbreak...HK$ remains pegged. Whither Trump? |
U.S. goods and services trade with Hong Kong totaled an estimated $66.9 billion in 2018. Exports were $50.1 billion; imports were $16.8 billion. The U.S. goods and services trade surplus with Hong Kong was $33.4 billion in 2018.As such, the US cannot punish Hong Kong with the same tariff it hits the rest of the PRC with since it mostly trades in services, not goods. So, how about restricting services trade with Hong Kong, then? One way the Trump administration has thought of doing this is by targeting the Hong Kong dollar's peg to the US dollar at about 7.8 HKD per USD:
The proposal to strike against the Hong Kong dollar peg, possibly by limiting the ability of Hong Kong banks to buy U.S. dollars, was raised as part of broader discussions among advisers to Secretary of State Mike Pompeo, Bloomberg’s report on Tuesday said. Undermining the peg was seen by some advisers as one way to hit back at China for its moves to whittle away at Hong Kong’s political freedoms, the report said.The ways it would work are by restricting access to US dollars:
Other administration members pushed back against the proposal, worrying that such a move would only hurt Hong Kong banks and the United States, not China, sources told Bloomberg. The idea also was not elevated to White House senior levels, the report said.
Market watchers are pondering what measures could be implemented to undermine the peg and what the fallout would be. Analysts at broker Hamilton Court FX predicted this could be done by reducing or rescinding swap lines, curbing Hong Kong authorities’ ability to buy and sell dollars in order to keep the currency within its defined trading range. Commerzbank analyst Hao Zhou called it a “low-possibility” event but with risk of huge market impact.Sure, the Trump administration's China-bashing appears boundless, from pulling out of the World Health Organization over allegations of unwarranted PRC influence to denying entry to foreign students who will only be taking online courses at US universities (since Chinese account for the largest number of foreign students). Remember, though, that the Hong Kong Monetary Authority--its central bank--has $445 billion worth of reserves to combat a US assault on the peg with. If things get tough, Hong Kong authorities have said they can further draw on the PRC's dollar stockpile. Most market commentators also describe this proposed action as futile since it would boomerang mightily on its perpetrator. So the Trump administration can try, but it will most likely fail--after plunging the world economy into heaven-knows-what that would make the global financial crisis look like a rom-com romp by comparison.
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Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce
It’s a fairly wacky idea that they would be able to force Hong Kong off the peg by some means. I’ve been against the idea that Kyle Bass and others trying to break the peg -- that has been a spectacularly unsuccessful idea so far, and I expect it to be the same.Stephen Innes, chief global market strategist at AxiCorp
Why this is bad not to mention an unlikely move: First, direct U.S. action against the peg could trigger China’s response by putting U.S. assets, including USTs or equities. Second, such a move could destabilize USD pegs elsewhere, including U.S. allies around the world, especially those in the Middle East. Third, the unthinkable instability that it would trigger in the USD-based global financial ecosystem could drive a selloff in US equity markets – an outcome abhorrent to the White House ahead of the November presidential election.Xia Le, chief Asia economist at BBVA Hong Kong
It’s technically difficult to impose, and it’ll hurt U.S. a lot. The peg is maintained by Hong Kong, which doesn’t need approval from the U.S. and not something the U.S. could easily manipulate. Technically, it’s very hard for them to prevent any businesses from investing in the city or limiting the ability of Hong Kong banks to buy U.S. dollars.Carie Li, an economist at OCBC Wing Hang Bank
At the moment, the Trump administration isn’t seriously considering this as it’s very risky for them. It’s more about specific restrictions for financial institutions under the sanctions. Hong Kong is the world’s third-largest U.S. dollar trading center, which would mean if the HKD can’t be pegged to the USD it would be unfavorable to the U.S. by curbing the number of transactions in U.S. dollars and would lower investor confidence in the greenback.Becky Liu, head of China macro strategy at Standard Chartered Bank
At this stage I personally assign a relativity low possibility for this to happen. Having said that, in the recent days U.S. has taken some totally unexpected actions by withdrawing from the WHO. So the likelihood of the U.S. doing something is still very likely, it’s just likely to be less drastic in terms of impacting the convertibility between the HKD and the USD, like setting a limit on how much exposure banks are able to have on the Hong Kong dollar or setting limits on the amount of exposure U.S. companies can have towards the Hong Kong dollar.