US - China | Why HK's $440B Reserve Can't Defend USD to HKD

On July 14, the U.S. announced it would revoke several provisions of the United States-Hong Kong Policy Act of 1992. This move further raised the question of whether USD to HKD peg will continue. Kyle Bass, founder of Hayman Capital, has been betting that this currency peg will break since last year. In 1983, Hong Kong experienced a currency crisis partially caused by concerns over the Sino-British negotiations over handing HK back to China, known as the “Black Saturday.” USD to HKD rose to historic high of 9.3. To save its financial system, Hong Kong established the Linked Exchange Rate System that has helped maintain the market’s confidence in the Hong Kong dollar. But Hong Kong now finds itself caught in the new U.S.-China cold war. The ties between the U.S. and Hong Kong are still close. Therefore it is unlikely that the U.S. will end all of its trade with Hong Kong and ban the Hong Kong dollar all of a sudden. But even if the U.S. doesn’t take direct actions against the Hong Kong dollar, the Linked Exchange Rate System's foundation has shifted. In 2015, an IMF working paper concluded that China had a more profound influence over Hong Kong's economy in the long term. But in the short-term, Hong Kong's business cycles tend to better match with the U.S. Therefore the Hong Kong dollar peg seemed appropriate. But many things have happened since 2015. The Hong Kong Monetary Authority claimed to have over 440 billion US dollars in its foreign currency reserve, enough to defend the Linked Exchange Rate System. Hong Kong’s Financial Secretary Paul Chan Mo-Po claimed the city has a currency swap arrangement with Beijing who will provide Hong Kong with a quota worth over 57 billion US dollars. But Hong Kong's foreign reserve plus the quota from Beijing is just over a quarter of its M2 money supply of about 1.95 trillion US dollars. Therefore, the Hong Kong Monetary Authority might not have enough to defend the USD to HKD peg.And how much of China’s 3.1 trillion foreign currency reserve is available for Beijing to use freely? Not a lot. As the U.S.-China cold war goes on, Hong Kong and its currency will likely decouple from the U.S. at an accelerating speed.

0:00 Introduction
0:48 The Linked Exchange Rate System
2:02 Will the U.S. Break the Peg
4:18 Building House on The Sand
6:13 How Will Beijing And Hong Kong Respond
6:52 The Risky And Expensive Defense
9:45 Going Forward

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References:

U.S. ending special treatment of Hong Kong amid tensions with Beijing https://fxn.ws/34ctFyG
China vows retaliation after Trump slaps sanctions on it for interference in Hong Kong https://cnb.cx/3fXtU2R
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