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Explainer: Dollar peg is critical to Hong Kong amid United States threats, China worries

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Explainer: Dollar peg is critical to Hong Kong amid United States threats, China worries

China’s national security law for Hong Kong and moves by the United States to begin withdrawing privileges enjoyed by the city under United States law have unsettled investors.


They have also raised fears about the stability of the Hong Kong dollar’s (HKD) 36-year old peg to its United States counterpart, prompting local officials to issue several reassurances.

The HKD is pegged in a narrow range of 7.75-7.85 to the United States dollar.

The Hong Kong Monetary Authority (HKMA) buys and sells the currency at either limit to maintain the range.

Buying HKD boosts it by reducing its availability and raises the costs of betting against the currency.

Sales do the opposite.

The HKMA has sold HK$106 billion ($13.68 billion) so far this year to keep a strengthening Hong Kong dollar within this range, according to Reuters’ calculations.

To maintain the peg, official Hong Kong interest rates track United States monetary policy.

The currency’s movement within the band is influenced by differences between market interest rates in both.

Hong Kong interbank rates HIBOR= are higher than their United States equivalents LIBOR=, helping keep the HKD strong in spite of concerns about outflows related to the new law.

There are fears that escalating United States-China tensions could result in the United States potentially limiting Hong Kong banks’ access to United States dollars, thus jeopardising the peg.

A Bloomberg report suggested this week that United States President Donald Trump’s policy advisers explored that option, though the idea did not gain any traction.

Analysts say the White House cannot hurt the peg in Hong Kong, one of the world’s largest United States dollar trading centres, without also hampering the greenback’s hegemony as a global currency.

Some call it a “nuclear option”.

“For the United States dollar, exorbitant privilege is not risk-free,’’ Geoff Yu, Senior EMEA Market Strategist at BNY Mellon, said in a note.

“The bottom line is that current rhetoric surrounding the Hong Kong dollar peg will likely stay as rhetoric.’’

Hong Kong also has more than $400 billion in reserves – six times the currency in circulation.

The HKMA can also call on China’s central bank for United States dollars, the city’s top finance official said recently.

Hong Kong’s economy has shrunk in its importance relative to the mainland since the territory’s 1997 handover to China but its financial significance has grown.

Any real threat to the peg risks undermining that.

With China maintaining tight capital controls, Hong Kong acts as a key financing conduit, hosting one of the largest stock markets in the world and acting as the biggest gateway for international investment in mainland stocks and bonds.

It has also become one of the world’s biggest currency trading centres and ranks third globally for United States dollar trading.

China’s wealthy have put faith in the city too, with more than half of Hong Kong’s estimated private wealth of more than $1 trillion coming from mainland individuals. ($1 = 7.7501 HKD)

AIB

Edited By: Abdulfatah Babatunde (NAN)

Babatunde Abdulfatah: is a graduate and a professionally trained journalist, with experience in national news reporting/editing and verification at the News Agency of Nigeria. NNN is a Nigerian online news portal that publishes breaking news in Nigeria, and across the world. Our journalists are honest, fair, accurate, thorough and courageous in gathering, reporting and interpreting news in the best interest of the public, because truth is the cornerstone of journalism and they strive diligently to ascertain the truth in every news report. Contact: editor[at]nnn.com.ng

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