- The US administration reportedly discussed limiting Hong Kong’s peg to the dollar that has been in place since 1983, in response to China’s draconian security law passed in May.
- Bloomberg reported Wednesday, that the possibility of limiting Hong Kong banks’ ability to buy dollars, has been raised with US secretary of the State Mike Pompeo, but not been escalated to senior White House officials yet.
- Critics of the law say it violates Hong Kong’s “one country, two systems” policy that has been in place since 1997, when Hong Kong gained independence from British rule.
- The US said it no longer considers Hong Kong to be autonomous following China’s move.
- Visit Business Insider’s homepage for more stories.
President Donald Trump’s top most officials considered proposals to limit Hong Kong’s peg to the US dollar as part of its response to China’s draconian law imposed last month. If the limit was to come in effect, it could spell the end of a decades long currency arrangement that has been in place since 1983.
Bloomberg reported Wednesday that the possibility to limit Hong Kong’s bank to buy US dollars was escalated to Secretary of the State Mike Pompeo. But the issue has not been raised to senior levels of the White House, suggesting the proposal is still at its infancy and has not gained traction yet, according to undisclosed sources close to the matter.
The currency peg has been in place since 1983, which has paved the way for the Hong Kong dollar to trade in a strict band around 7.8 Hong Kong dollars per US dollar.
China’s draconian law
But China approved a draconian law in late May, intended to increase its grip over neighbouring Hong Kong, raising the spectre of the US retaliation and knocking off the peg.
While China argued that the law was needed for security reasons, critics of the law said it threatened the one country, two systems policy.
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The US responded then by saying it no longer recognized Hong Kong as autonomous.
Meanwhile, Bloomberg reported that some in the administration are opposed to undermining Hong Kong’s peg to the dollar as they believe such a move would cause pain for Hong Kong and the US, rather than hurt China.
A spate of ways are being considered on how the US can punish both countries for violating the one country, two systems policy, a person familar with the matter told Bloomberg.
The source added though that changing Hong Kong’s dollar peg with the US is a less popular option than cancelling a US-Hong extradition treaty or ending co-operation with Hong Kong’s police, Bloomberg reported.
Why the currency peg matters
Hong Kong’s finance secretary Paul Chan was quick to soothe investors’ jitters in early June by saying it had no plans to change its currency peg to the US dollar.
But that alone has failed to completely erode the possibility of the system being broken.
Chan told Bloomberg he had nothing different to add, indicating that the Asian hub still expects the Hong Kong peg to remain in tact.
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He said last month that should the US slap the city with sanctions, China’s central bank could provide American dollars to mitigate the economic impact. China holds more than $3 trillion of foreign exchange reserves and might look to use that to offset any losses due to sanctions.
The Hong Kong dollar to US dollar exchange rate was little affected by Wedneday’s recurring threat as the Hong Kong dollar traded at 7.7503 per US dollar, marginally above the upper end of 7.75 price range as of 5:37 am ET.
Pompeo has been a vocal critic of China’s Draconian law. Last month, it was exploring whether to punish British bank HSBC, for failing to speak out against the law.
Last month hedge funds and traders in the world’s sixth-largest financial centre were worried they will find themselves in Beijing’s direct line of fire and were considering moving operations.
Analysts have also predicted that the Draconian law could undermine Hong Kong’s position as the sixth largest financial centre and prompt it to lose business to Singapore.
People familiar with the matter have said the currency peg issue has become the focus of major financial bets, by Hayman Capital Management founder, Kyle Bass who started a fund last month betting on the collapse of the currency peg, sources told Bloomberg.
Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce told Bloomberg: “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.”
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