Hong Kong Dollar at Stake Amid Ongoing Protest

The ongoing dispute surrounding the highly controversial extradition law could shock the Hong Kong Dollar, analysts and traders fear.

The U.S. warned the continued erosion of the “one country, two systems” framework could jeopardize the city’s special status in international affairs.

The warning came after the Hong Kong government proposed to amend a highly controversial extradition bill that led to mass protests in the city, with hundreds of thousands of residents hitting the street.

The amendments to the extradition bill could damage Hong Kong’s business environment “and subject our citizens residing in or visiting Hong Kong to China’s capricious judicial system,” said State Department spokeswoman Morgan Ortagus.

In a press conference this week, Hong Kong leader Carrie Lam refused to completely withdraw the extradition law. Traders are now concerned that the Hong Kong dollar will suffer if the impasse continues.

Currently, the Hong Kong currency is linked to the U.S. dollar using a semi-peg system.

The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, must control the supply and demand of the Hong Kong dollar in order to keep it pegged to its U.S. counterpart at the agreed exchange rate.

Now hedge-fund managers are doubting whether the HKMA has enough usable reserves to defend the peg.

Kyle Bass, founder of Hayman Capital Management, said that US$495 billion is required in reserves to maintain the currency peg.

The amount is 13.53 percent higher than the HKMA’s current reserves stash of US$436 billion. It has spent 80 percent of its reserves over the past year defending the peg, Bass claimed.

“Once depleted, the pressure on the currency board will become untenable and the peg will break,” Bass wrote in an investor letter.

Furthermore, U.S. Secretary of State Mike Pompeo has said earlier that issues related to the extradition law will be among the topics President Donald Trump and his Chinese counterpart Xi Jinping discuss at the G-20 summit in Japan next week.

“We see what’s happening, what’s unfolding in Hong Kong. We are watching the people of Hong Kong speak about the things they value,” Pompeo told Fox News over the weekend.

A U.S. congressional commission said last month that if Hong Kong’s degree of autonomy continues to diminish, Washington would re-examine elements of its relationship with Hong Kong outlined in the 1992 law.

The impact could spill over to areas including the grant of visas, law enforcement, and investment, but any move to end the special treatment for Hong Kong is unlikely in the near future, as the U.S. has also benefited from the business-friendly conditions in Hong Kong.

Data from the State Department showed 85,000 U.S. citizens lived in Hong Kong in 2018 and more than 1,300 U.S. companies operate there, including nearly every major U.S. financial firm.