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Hong Kong is going through its toughest period in modern history. Last year, the autonomous region suffered its first recession in years as the government tried to pass an unpopular extradition bill. This year, like all places, the city has been affected by the coronavirus pandemic and a recently passed security law by China. All these issues have led some to question the Hong Kong dollar peg. Indeed, Kyle Bass, a billionaire who correctly predicted the housing crisis, has just made an audacious bet that the peg will collapse.
What is the Hong Kong dollar peg?
Hong Kong is one of the biggest financial cities in Asia. It is home to thousands of global companies, who value it for the “one country, two systems” system of government. The system allows the city to be mostly independent of China.
For almost 40 years, the city has pegged the Hong Kong dollar to the US dollar. The goal is to reduce the volatility of the currency and make it more predictable for multinationals operating in the region.
In the past five years, the Hong Kong Monetary Authority (HKMA), the de facto central bank, has allowed the Hong Kong dollar to trade between 7.75 and 7.85. The bank buys or sells US dollars if the Hong Kong dollar gets too strong or too weak. When the bank sells US dollars to buy local currencies, it drains the HKD in the market, pushing the borrowing costs higher.
The bank has sold almost H$50 billion since April. This week, it sold about HK$1.43 billion worth of local dollars for the sixth straight day.
Is the currency peg at risk?
There are two opinions in the market about the Hong Kong dollar peg. First, there are those people who believe that the Hong Kong economy cannot survive the ongoing upheavals. Indeed, according to Bloomberg, many fund managers and companies like Expedia and Riot Games have moved from the city. Most of them have headed to Singapore, an equally successful Asian giant.
On the other hand, there are those who believe that the city will continue being a financial hub in the region. They point to the success of the Hong Kong Stock Exchange and the large inflows of funds from mainland China. Similarly, they argue that the development of the Greater Bay Area will help the city retain its power.
Most importantly, the optimists point to the fact that the Hong Kong dollar peg has existed for almost 40 years as evidence that it will survive this time.
Final thoughts
In recent weeks, the Hong Kong dollar has traded at the higher side of its peg against the US dollar. The ongoing tensions between China and the United States could lead to more volatility for the HKD. Therefore, if you are sending money to and from Hong Kong, at MoneyTransfer, we can help you get the best rate.
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