MacroscopeGreat power competition between China and the US poses risks to Australian and Hong Kong dollars

White House’s public embrace of rivalry suggests that economies with high exposure to China could be forced to make difficult choices soon

Decision to remove Hong Kong’s special status opens the door to speculative attacks when higher interest rates would increase economic pain

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A man exchanges Hong Kong dollars for US dollars at a money changer in Sham Shui Po on May 29. People have been exchanging Hong Kong dollars in fear of the currency dropping in light of the new national security law. Photo: Edmond So

Published: 10:00pm, 2 Jun 2020Updated: 10:47pm, 2 Jun 2020

There is no beating around the bush. The United States now sees its relationship with China as “one of great power competition”. Geopolitics aside, this official assessment in the White House report, “The United States Strategic Approach to the People’s Republic of China”, published on May 20, will have wide implications, including for the currency markets. The Australian dollar and the Hong Kong dollar may prove vulnerable in this power game.

“Given the strategic choices China’s leadership is making,” the document states, the US now “acknowledges and accepts” that its relationship with the Republic Republic of China is one of great power competition. And in great power competitions, such as during the Cold War, countries are often forced to make difficult choices that have serious economic effects.

Australia may be a case in point. In recent decades, Australia’s economy has become more entwined with that of China, but Canberra’s security policy has remained closely aligned with Washington.

Australia has benefited greatly from the expansion of its trade with a Chinese economy that has a huge appetite for natural resources such as iron ore and thermal coal, an appetite Australia’s mining sector has been able to supply. Australian farmers have reaped great rewards from supplying China with agricultural goods from barley to beef.

Such was the perceived interconnectedness of the two economies that in the currency markets, one way of expressing a bullish view on China was to buy Australian dollars, the so-called China proxy trade. Those economic ties are under increasing strain, though.