Hong Kong’s status as a finance hub makes it a US target, which may force China to change tactics for internationalising the yuan

Politicians in the US Congress are due to vote soon on the Hong Kong Human Rights and Democracy Act. Whether or not the bill is passed, it shows that US intervention in Hong Kong will only increase as the city becomes a geopolitical battlefield amid US-China strategic competition and friction. This will not only affect Hong Kong’s entrepot trade but also its status as a financial centre and the internationalisation of the yuan.

Unlike trade, financial transactions are focused on market stability and risk control. If a market’s position cannot be determined, investors will be encouraged to withdraw to a less risky place. The current crisis will undoubtedly affect Hong Kong’s development as China’s largest offshore yuan trading centre, a growing market of more than 600 billion yuan (US$84.5 billion).

Yuan deposits in Hong Kong have risen to about 644 billion yuan, with total cross-border trade settlement in yuan remittances worth nearly 500 billion yuan. Hong Kong is the world’s largest offshore yuan foreign exchange and over-the-counter interest rate derivatives market, and the largest offshore yuan bond market. It also boasts an established mechanism to issue central-bank notes.

So it’s easy to see why Hong Kong’s financial markets, especially its offshore yuan trading market, are becoming American targets.

Intensifying US scrutiny is also a manifestation of the currency-based geopolitical competition as the world shifts from the US-dollar-based single monetary system towards a multi-geographical monetary system. Given the prevailing global economic and financial situation, the internationalisation of the yuan will encounter a lot of resistance, as has happened with China's foreign trade and investment.

The US has increased the friction on Hong Kong in its role as an offshore yuan centre, attempting to use it as a bargaining chip. This is the embodiment of a geopolitical currency conflict. It also means US-China competition is widening, from a trade conflict to a financial war, and Hong Kong is a key friction point.

From a geopolitical perspective, markets in the regions covered by China’s Belt and Road Initiative will remain the main area for future renminbi internationalisation. However, these regions also face US suppression and interference.

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Hong Kong has the potential and advantages to become a regional hub in the establishment of close links between finance and trade in Southeast Asia and the countries that are part of the belt and road plan. However, given the possibility of US sanctions, Hong Kong’s status has become unclear.

For China, linkages with financial markets in developed countries are important, too. Offshore renminbi trading needs to be multi-centred to connect different geopolitical currencies.

Financial centres such as London, Singapore and Tokyo may become more important components of the renminbi’s diversified market, taking on the roles of linking the investment and trade needs of developed countries such as Europe, the US and Japan.

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Hong Kong continues to play a vital role in the economic development of Guangdong and Macau, and the wider region, and can still be an entry point and bridge for foreign capital to enter China. As for renminbi internationalisation, Hong Kong can help to enhance the competitiveness of the yuan, as well as major international currencies, given its institutional advantages.

However, whether these functions can be extended in the future depends to a certain extent on the scale of the US’ action on Hong Kong.

Chen Gong founded Anbound, an independent think tank headquartered in Beijing, in 1993, and is its chief researcher. Wei Hongxu, a researcher at Anbound, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK