US sanctions against China for imposing a national security law on Hong Kong could include barring the Hong Kong dollar from being freely convertible against the greenback, which would be more pragmatic than unpegging them, according to some analysts.
But such a move could put the Hong Kong dollar’s survival at risk.
The Hong Kong dollar has been pegged at HK$7.8 per US dollar since 1983, but is allowed to trade in a range between HK$7.75 and HK$7.85.
The US government initially considered unwinding the peg, but President Donald Trump dropped the idea because it would be too complex to implement, according to a Bloomberg report on July 14.
China’s new national security law has further deteriorated ties between the world’s largest and second largest economies, which were already frayed by their long-running trade war.
The law, which became effective on July 1, prohibits any “act of subversion” in Hong Kong against the Chinese government. The US says it undermines Hong Kong’s autonomy and is threatening sanctions against China.
The Trump administration has already ended Hong Kong’s special trading status, which means the city can no longer enjoy lower trade tariffs compared to Mainland cities in dealings with the US.
Chi Lo, a senior economist for Greater China at BNP Paribas Partners, says it’s against “conventional wisdom” to unpeg the Hong Kong dollar from the greenback because it’s a policy choice made by Hong Kong, not the US.
Furthermore, the Hong Kong Monetary Authority has ample financial resources to defend the local dollar, Mr. Lo tells Asia Asset Management (AAM).
He believes a more pragmatic option for the US would be to prohibit the Hong Kong dollar from being freely convertible against the greenback.
“But the Hong Kong dollar may not survive if the US denies free convertibility of the US dollar to the Hong Kong dollar,” he says.
The US dollar is used as conduit for currency cross rates in global foreign exchange markets. Mr. Lo points out that if the Hong Kong isn’t freely convertible against the greenback, not only will there be no trades between the two currencies, there will also be no cross rates between the Hong Kong dollar and other counterparts.
He deems the probability of currency and other financial sanctions against Hong Kong to be low as such measures may hurt US interests since there are many US banks and companies in the city.
Terence Chong, associate professor of economics and executive director of Hong Kong-based Lau Chor Tak Institute of Global Economics and Finance, also doesn’t expect the Trump administration to take any action related to the Hong Kong dollar, including unpegging it from the greenback.
“The unpegging will undermine the acceptance and circulation of the greenback globally,” Mr. Chong tells AAM.
Should the US decide to unpeg the currencies after all, it would be “detrimental to all parties involved in Asian banking systems”, according to Axel Botte, a global strategist at Ostrum Asset Management.
China could retaliate by selling some of its vast US Treasury holdings worth US$1.07 trillion.
Mr. Botte predicts that if China and Hong Kong were to sell some of their combined $1.2 trillion of US treasuries, it may promote the use of the Hong Kong dollar and the Chinese RMB for trade settlements and financial transactions globally.
“Over time, the unpegging could potentially divide the global market into three currency zones: the US dollar, RMB and euro,” he tells AAM.