Hurting Hong Kong dollar peg might come at a ‘high expense’ to the greenback

Hurting Hong Kong dollar peg could come at a 'high cost' to the greenback

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While U.S. President Donald Trump might reasonably assault the Hong Kong dollar’s peg to the greenback, the expense would be “very high,” stated Becky Liu, head of China macro technique at Standard Chartered Bank.

Last week, Bloomberg reported that Trump assistants had actually dropped the concept due to insufficient assistance and issues about application along with whether the relocation would backfire. Bloomberg had actually formerly reported that leading consultants had actually thought about weakening the peg in weighing possible retaliation for China enforcing a nationwide security law in Hong Kong.

Two approaches the White House might utilize to harm the peg would likely backfire, Liu informed CNBC’s “Street Signs” on Wednesday.

One method would include the U.S. weakening Hong Kong exchange funds’ capability to hold U.S. dollar-denominated possessions, stated Liu. “But impacting one of the world’s largest reserve managers’ ability to hold U.S. dollar reserve assets would seriously undermine U.S. dollar’s role as the international reserve currency,” she included.

The Trump administration might likewise damage Hong Kong banks’ capability to get the greenback or strip them of their capability to perform dollar cleaning activities. But that would harm the worldwide monetary markets “too severely” and might cause a worldwide monetary crisis, she included.

The market nevertheless need to not eliminate the possibility that the Trump administration might limit some banks —especially Hong Kong branches of Chinese banks — from accessing U.S. dollar liquidity or from performing dollar payments, she stated.

‘Hong Kong dollar is China’s U.S. dollar’

Amid geopolitical stress in between the U.S. and China, Liu stated the “Hong Kong dollar is China’s U.S. dollar.”

Last week, Trump signed legislation to enforce sanctions on China. The law, called the Hong Kong Autonomy Act, would slap necessary sanctions on Chinese authorities and business that assisted back Beijing’s imposition of a security law. Secretary of State Mike Pompeo has actually consistently slammed the nationwide security law in Hong Kong, calling it “Orwellian.”

Liu stated business on the U.S. entity list would wish to prevent some direct dollar threat direct exposure — and the Hong Kong dollar has actually ended up being the very best option.

With Chinese business possibly delisting from U.S. exchanges, the Hong Kong market has actually ended up being the very best option for business aiming to raise funds in foreign currencies besides the Chinese yuan.

As Hong Kong’s forex reserves are amongst the biggest internationally, the currency of the Chinese unique administrative area is “difficult to attack,” stated Liu.

“As such, it has become one of the alternative best currencies for those Chinese companies who cannot avoid U.S. dollar currency risk, but it has become increasingly more risky for them to be directly holding U.S. dollar or U.S. dollar account.”

Due to the narrow band in which the Hong Kong dollar is selling, “holding (the) Hong Kong dollar is almost equivalent in terms of holding U.S. dollar when it comes to currency exposure and we expected Hong Kong dollar to play a much larger role amid these geopolitical tensions.”

— CNBC’s Weizhen Tan added to this report.

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