Hong Kong Executive Council member and former president of the Hong Kong Monetary Authority Yam Chi-kwong, recently in a media interview, was asked about the U.S. sanctions against Hong Kong. He said “the current sanctions, only on the sanctions list of people with a greater impact, I believe that the United States will not expand the sanctions to institutions or government …… believe that the United States is highly unlikely to launch the United States dollar to prevent Hong Kong from using ‘nuclear weapons ‘” But he also said, “Do not give you hook (U.S. dollars), then Mickey hook the second kind of lo!” And that the Hong Kong dollar linked exchange, to have a back-up plan. These statements of Ren at this sensitive moment, it is worth noting.
According to the U.S.-Hong Kong Policy Act of 1992, the U.S. will allow the Hong Kong dollar to continue to be freely convertible into U.S. dollars if Hong Kong maintains autonomy after 1997, guaranteeing Hong Kong’s supply of U.S. dollars. after 1997, Hong Kong’s central bank, the Monetary Authority, is independent of China’s central bank, the Central People’s Bank, and maintains its own account with the U.S. Federal Reserve. Hong Kong’s trade and capital flows in and out because of the long-term outflows, the HKMA accumulated a large amount of U.S. dollars and had enough ammunition to cope with fluctuations in the Hong Kong dollar exchange rate and maintain the linked exchange rate without having to rely on the U.S. side’s assurance regarding the supply of U.S. dollars.
For example, in the spring of last year, when the global epidemic hit the global economy, trade and investment flows came to a halt, but many companies in Hong Kong, including Chinese companies, still needed a lot of U.S. dollars for turnover. At that time, the HKMA borrowed $10 billion in emergency loans from the Federal Reserve, and then lent it to banks in Hong Kong.
The recent loss of Hong Kong dollar deposits is huge, losing one trillion dollars on a monthly basis. All kinds of indicators also show that the emigration of Hong Kong people overseas, is also growing significantly. Hong Kong people who emigrate have to sell their assets, put forward their deposits and exchange them for foreign currencies to take away. If the trend continues, all these will put pressure on the Hong Kong dollar.
If these developments persist, it may become increasingly difficult for the HKMA to maintain a fixed exchange rate between the Hong Kong dollar and the US dollar in the future. These possibilities are unimportant to most speculators who speculate in the financial markets on a short term basis with a horizon of no more than a week, but financial officials in Beijing and Hong Kong should have this in mind. It is certainly no coincidence that Ren mentions the possibility of Hong Kong decoupling from the US dollar and pegging it to other currencies (the yuan) instead at this time, speaking of a fallback plan.
On a more serious note, when Beijing introduced the National Security Law in Hong Kong, Washington reportedly discussed using the “nuclear bomb option” to impose sanctions on the Hong Kong government and even the entire financial system to cut off the supply of US dollars to Hong Kong. This could have been done by closing the HKMA’s separate account at the Federal Reserve and merging it with that of the People’s Bank of China. But at the time, the Trump administration decided not to pursue this option, instead targeting individual officials with sanctions.
Last week the U.S. State Department released its latest report on the Hong Kong Policy Act, which mentions that Hong Kong’s political autonomy has nearly disappeared and that the future of the rule of law is worrisome. The only thing left in the report is that Hong Kong still has autonomy in the financial area. The HKMA is still independent of the People’s Bank of China in terms of policy making. This indicates that the United States does not yet intend to nuke Hong Kong anytime soon.
However, if the nuclear option is discussed, it may be considered again in the future if the situation deteriorates further. Individuals, foreign investors and local companies that have to plan for the long term cannot afford not to consider the possibility that the U.S. will finally resort to systemic sanctions against Hong Kong in the future. As immigration and capital flight intensify, the likelihood that the Hong Kong dollar will be forced to decouple from the U.S. dollar increases. Under the linked exchange system, the Hong Kong dollar is the U.S. dollar, and Chinese capital needs to raise foreign debt and obtain U.S. dollars through Hong Kong, an offshore financial center. If the Hong Kong dollar is pegged to the RMB in the future, the Hong Kong dollar will become the RMB.
The Chinese Communist Party has promised to open up its finance to the world, but in reality it is tightening up and tightening capital controls. When the Hong Kong dollar is pegged to the RMB, Hong Kong will be formally incorporated into China’s financial iron curtain, and Hong Kong will disappear as the only offshore financial center in China with an independent currency and a central bank, and fully connected to global finance. At that time, it may be as difficult, if not more difficult, for Hong Kong people to remit money overseas as it is now for mainland Chinese people (because many Chinese people now rely on Hong Kong as a window to remit money). Friends who are not prepared for the future now, it will be too late to regret.
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