China’s yuan exchange rate drop could roil already strained Hong Kong-protest hit economy
- The yuan fell below the key level of 7 to the US dollar last week for the first time in 11 years, and could hit tourism and retail spending from mainland Chinese visitors
- Investment flows into Hong Kong may increase through Stock Connect if investors expect the yuan to fall further amid the US-China trade war and Hong Kong protests
Hong Kong’s economy, already straining under the weight of anti-government protests as well as the US-China trade war, is now set to feel the pressure of a weaker Chinese yuan.
The impact could also spread to Hong Kong’s financial markets as expectations of a cheaper yuan, a sign of the gradual weakening of China’s economy, has in the past encouraged international speculators to place large bets against the yuan in Hong Kong. China’s closed capital account provides a firewall against such attacks, but Hong Kong, as a free financial centre, offers an ideal playground for speculators.
Mei Xinyu, a researcher affiliated with China’s Ministry of Commerce, wrote on Monday that Hong Kong could be the key battlefield in a “financial war” between China and the US, with Hong Kong-traded stocks of Chinese companies particularly vulnerable to attack.
Hong Kong has already proven its resilience in the last two rounds of yuan depreciation. In 1998, amid heavy international betting on yuan depreciation, the city faced down investors like George Soros with an unprecedented HK$118 billion (US$15 billion) stock-buying spree to prop up equity prices and defend the currency peg.