The Collapse of the Hong Kong Dollar?

Updated: Jul 18, 2020

China’s recent introduction of a new national security law for Hong Kong has added even more concern for the stability in the region and the freedom of democracy in Hong Kong. This was the exact provocation which Trump suggested would significantly diminish strong U.S Hong Kong Ties. The final and long-term response from the U.S has not been stated yet, but the establishment of the law could mean the end of trading agreements and the peg the Hong Kong Dollar has had to the U.S Dollar since 1983. Other casualties in the break-off could be any tariffs, visa laws and investment into Hong Kong.

The first measures have already been taken by US House of Representatives in response to the imposition of the security Law. The sanctions which are yet to be approved by the senate and Trump, focus on penalising banks which are engaged in transactions and have ties to Chinese officials. Specifically, Chinese officials which have been involved in targeting and prosecuting pro-democracy protesters. However, the most dangerous measure which Hong Kong officials are worried about is the withdrawal from the peg agreement between the two currencies.

For the last 36 years, the HKD has been pegged to the USD in a range of values of 7.75-7.85 to the dollar. To stay within this range, The Hong Kong Monetary Authority (HKMA) stay correlated with U.S monetary policy and buy and sell the local currency.

Source: fxstreet

Fears are now growing over the future of the peg because of the U.S-China tensions in the region. With Hong Kong having one of the world’s stock exchanges and currency trading hubs, as well as being home to some of the largest corporations, its importance in the global economy is significant to say the least. There are some safety nets put in place by Hong Kong to maintain stability. Hong Kong has the 8th largest foreign exchange reserves in world, holding over $442 billion for events of rapid  national currency devaluation. Should sanctions be imposed on Hong Kong, China’s central bank which holds the world’s largest foreign exchange reserves, is likely to also swap currency to prevent any repercussions. 

An outpour of other businesses is also a possibility for Hong Kong, large tech firms like Google and Facebook have offices in the administrative region. Many could possibly relocate as the law gives Hong Kong police a greater power over social media accounts. However, businesses from mainland China still make up for 73% of the Hong Kong Stock Exchange (SEHK) and the influx of Chinese corporations and conglomerates is likely to increase with the greater Chinese presence in Hong Kong. Their response to the crisis is yet unknown as no major relocations have occurred yet.

Could anyone benefit from this?

Definitely. The withdrawal of investment from Hong Kong would most likely be repositioning in the other major Asian finance hubs in Singapore and Japan. The Singapore government offers over 76 comprehensive avoidance of double tax agreements (DTAs) as well as a very highly skilled local workforce, making it very appealing for businesses to relocate operations. New attractive structures for companies and investment funds have also been established since the turmoil started in Hong Kong. Singapore has already seen large a large influx of capital due to the U.S-China conflict. Reuters reported, an increase of 44% in nonresident deposits in April 2020 compared to April 2019 according to The Monetary Authority of Singapore (MAS). Foreign-currency deposits are also reportedly up by 200% since the start of the new year. A drastic response from Trump and the U.S is likely to result in even more relocation of business and investment. Although many analysts have speculated that the majority of investors will keep their money in Hong Kong, just the cost of doing so will increase. 

The removal of the peg to the dollar and potential rapid decline of the region’s function could lead to a large series of ramifications. The administrative region is currently the 3rd biggest center for foreign exchange and although Hong Kong’s production is not as much as it was in the late 1990’s, total payments passed through the region are in the region of $10 trillion. For now, stabilisation is the main concern of Hong Kong’s biggest banks and corporations. HSBC’s chief executive Wong Tung- shun along with many other large banks have already signed agreements for support of the new security law. A statement was also issued from the HSBC saying they are in favour of any law which will provide stability to the area. Now officials await to see the U.S response to the imposition of the security law so that the future of Hong Kong can be clearer.

By Moni-Alexander Venev - Analyst in Foreign Exchange at TheLFJ

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