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Currency war
EconomyChina Economy

Could US sanctions over Hong Kong national security law worsen China’s US dollar shortage?

  • Analysts say the proposed national security law for Hong Kong could mark the beginning of a process cutting China’s access to US dollars
  • China recorded a current account deficit in the first quarter of 2020, meaning it was a net exporter of US dollars

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In May, China posted a record trade surplus of US$62.93 billion, largely down to a sharp drop in imports due to weak domestic demand. Photo: Xinhua
Karen Yeung

US President Donald Trump’s recent threat to penalise China and Hong Kong for Beijing’s decision to impose a national security law on its special administrative region could mark the beginning of a process to cut off access to US dollars, analysts said.

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While the composition of the measures from the United States remains unclear, most analysts do not expect the Trump administration to impose extreme sanctions against Chinese financial institutions which would cut them off outright from the US dollar payments system, which is underpinned by the Swift network. In addition, avoiding a full-blown financial war with China over Hong Kong would preserve the phase one trade deal, in which US Trade Representative Robert Lighthizer expressed support for last week.

But there is potential for increasing restrictions to reduce financial and trade ties with China, gradually choking off the supply of US dollars in China.

One possible step that Washington could take would be to sanction individuals in China and Hong Kong deemed to have violated human rights under the Hong Kong Human Rights and Democracy Act that was passed in the US last year.

Either China has to ensure that dollars keep flowing or the globalised dollar world excludes China, which is equivalent of putting a ‘bamboo curtain’ around the country
Michael Every

Michael Every, Asia-Pacific senior strategist at Rabobank, said if this were to happen, a key question would be whether large, globally interconnected Chinese banks conducting business with those individuals would then be subject to the same sanctions.

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