Hong Kong’s US dollar peg could be a weak link if protests drag on, China scholar warns

The 36-year-old peg between the Hong Kong and US dollars, a major pillar of financial investor confidence in the city, could turn into a weak link if financial markets were to turn sour, causing a “double hit” to the city’s economy, a Chinese scholar has warned.

Hong Kong’s unique linked exchange rate regime has helped the city maintain economic prosperity over the past decades, said Zhou Luohua, vice-president of the Chongyang Finance Research Institute at the Renmin University of China.

But, he said, the system is now too rigid, becoming the “Achilles’ heel” of the Hong Kong economy, making the city extremely vulnerable to large declines in its stock market or property prices.

“If property and stock prices start to fall, the Hong Kong Monetary Authority can’t provide sufficient liquidity like the [US] Federal Reserve or other central banks as its money supply capacity is determined by the size of its US dollar reserves,” Zhou said in a statement on the Chongyang Finance Research Institute website. “If asset prices are plunging, it would trigger an exodus of funds at the same time, translating into a ‘double hit’ for the Hong Kong economy.”

Zhou’s warning was the latest questioning the sustainability of the peg, which has kept the exchange rate at 7.8 per US dollar since 1983, although the Hong Kong Monetary Authority (HKMA) has repeatedly defied speculation that it has any plan to change it. The exchange rate is now allowed to move within a trading band of between 7.7500 and 7.8500.