Why Hong Kong can’t afford to keep its currency pegged to the US dollar
Hong Kong’s currency is facing its biggest test since the global financial crisis of 2008.
The former British colony still pegs the value of its money to that of the US dollar. It’s an arrangement that dates back almost four decades and has long been considered a guarantee of financial stability and prosperity.
But in recent months, the Chinese city’s de facto central bank has had to burn through a huge chunk of cash buying Hong Kong dollars to maintain the peg to the US currency.Traders are exploiting uncertainty over Hong Kong’s future as an international financial center and differences in interest rates between the city and the United States. Geopolitical tension and Beijing’s tighter grip, in particular, are denting its long-term outlook as a global financial hub.
Hong Kong’s aggregate balance, a gauge of liquidity levels in the banking system, has declined rapidly over the past year, and is down more than 90% from its peak in 2021. It fell to just 44.76 billion Hong Kong dollars ($5.7 billion) by Monday, the lowest level since November 2008.
The steep fall is a sign that investors are ditching the Hong Kong dollar. The city still has ample foreign reserves that can be used to prop up the currency, according to officials. But that hasn’t quelled market worries. Some analysts are urging the city to cut loose from the US dollar completely.
“Hong Kong’s currency peg to the dollar is not sustainable. The city risks being increasingly led by US monetary policy,” independent economist Andy Xie wrote last month. “As global yuan demand grows, switching to that currency would boost Hong Kong’s financial fortunes.”
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