Hurting Hong Kong dollar peg could come at a ‘prime value’ to the greenback

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While U.S. President Donald Trump could realistically assault the Hong Kong dollar’s peg to the greenback, the value could be “very high,” mentioned Becky Liu, head of China macro technique at Standard Chartered Bank.

Last week, Bloomberg reported that Trump aides had dropped the concept due to insufficient improve and issues about implementation in addition to whether or not the transfer would backfire. Bloomberg had in the past reported that best advisors had thought to be undermining the peg in weighing attainable retaliation for China implementing a nationwide safety regulation in Hong Kong.

Two strategies the White House could use to harm the peg would most likely backfire, Liu informed CNBC’s “Street Signs” on Wednesday.

One means would contain the U.S. undermining Hong Kong trade finances’ skill to hang U.S. dollar-denominated property, mentioned 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 added.

The Trump management could additionally undercut Hong Kong banks’ skill to download the greenback or strip them in their skill to habits dollar clearing actions. But that might harm the world monetary markets “too severely” and could result in a world monetary disaster, she added.

The marketplace on the other hand must no longer rule out the risk that the Trump management could prohibit some banks —in particular Hong Kong branches of Chinese banks — from getting access to U.S. dollar liquidity or from accomplishing dollar bills, she mentioned.

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

Amid geopolitical tensions between the U.S. and China, Liu mentioned the “Hong Kong dollar is China’s U.S. dollar.”

Last week, Trump signed law to impose sanctions on China. The regulation, dubbed the Hong Kong Autonomy Act, would slap obligatory sanctions on Chinese officers and corporations that helped again Beijing’s imposition of a safety regulation. Secretary of State Mike Pompeo has time and again criticized the nationwide safety regulation in Hong Kong, calling it “Orwellian.”

Liu mentioned firms on the U.S. entity checklist would need to steer clear of some direct dollar possibility publicity — and the Hong Kong dollar has change into the easiest selection.

With Chinese firms doubtlessly delisting from U.S. exchanges, the Hong Kong marketplace has change into the easiest selection for firms taking a look to carry finances in foreign currency echange instead of the Chinese yuan.

As Hong Kong’s foreign currency echange reserves are amongst the greatest globally, the forex of the Chinese particular administrative territory is “difficult to attack,” mentioned 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 slender band through which the Hong Kong dollar is buying and selling in, “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 contributed to this document.

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