Explainer | The Hong Kong dollar’s 36-year-old peg to the US dollar will survive current tensions between the US and China – here’s why
- Hong Kong does not need US approval to keep the peg going
- The US can ban the HKMA or other lenders from trading US dollars, but that may trigger a global market slump, and even endanger Trump’s re-election
As China moves closer to imposing a national security law in Hong Kong, fears have arisen that the Trump administration might break the 36-year-old peg system that fixes the currencies’ exchange rate at 7.8 Hong Kong dollars per US dollar.
There is concern US President Donald Trump might revoke the city’s special trading status, or even slap sanctions on the city. In a worst-case scenario, the US could ban Hong Kong from accessing the US dollar clearing pool or add more restrictions on its trading of the US currency, curbs similar to those placed on Iran.
But Hong Kong government officials and bankers played down these worries, while the exchange rate remained stable as of Friday, as all believed Trump would not go to such an extreme.
What is the peg? How does it work?
Hong Kong adopted a fixed exchange rate against the US dollar on October 17, 1983. It was established at a moment of crisis in confidence, with the British and mainland Chinese governments discussing the 1997 handover of Hong Kong.
John Bremridge, the city’s financial secretary at that point, announced the peg after a sharp fall in the exchange rate to HK$9.5 per US dollar from about HK$6 that month. The peg has remained unchanged since then.
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Under the currency board system behind the peg, Hong Kong’s monetary base is fully backed by foreign reserves, while the local interest rates move in lockstep with those in the US. The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, uses HK$4.094 trillion (US$528.6 billion) to defend the peg and to make sure it trades within the range of HK$7.75 to HK$7.85. In 1998, the government spent HK$118 billion to buy stocks and futures to drive away currency speculators who wanted to break the peg.
Does Hong Kong need US approval to keep the peg going?
