AbacusWhat becomes of the Hong Kong dollar? Singapore may hold the secret

I vividly recall May 2016, when a high-ranking member of the Chinese Politburo Standing Committee and chairman of the National People’s Congress, Zhang Dejiang, made a rare visit to Hong Kong. I must admit I felt rather sorry for Mr Zhang, as his trip was unfortunately going to be confined to the stretch of Harcourt Road between the Convention Centre and the Legislative Council.

Along Harcourt Road, the herringbone pattern of pavement bricks had been glued down with epoxy to stop protesters throwing them at him, and riot barriers had been erected along the street, with 6,000 armed police and rooftop snipers in position to keep order. There were no people lining the streets waving little flags, no kissing of babies for the cameras and no fancy roast goose dinner with local business leaders. He came, he said some things that were intended to be soothing, and then he went, paving the way for Carrie Lam to take charge.

At the time I worried that this kind of reception indicated we were near a tipping point in the hands-off relationship between mainland China and Hong Kong. Later, the rediscovery of the 1992 United States-Hong Kong Policy Act which the US could use to revoke Hong Kong’s special trading status sent shivers down spines around town. I was chastised by colleagues in finance who repeatedly told me Hong Kong was safe. With its superior judiciary and status as China’s gateway to the US dollar, the city was surely too important to risk losing. China needed Hong Kong and the Hong Kong dollar to remain stable so the mainland could continue to do its global deals. Of course, things have got a lot worse since then. Some of the glued-down bricks were eventually dug up and hurled at police. The feared tipping point was reached, and last Tuesday the US revoked Hong Kong’s special status. Here we are today wondering and worrying: what becomes of the Hong Kong dollar?

With the relationship between Beijing and Washington getting progressively icier, there have been suggestions that the White House might like to weaponise the US dollar to strike against China, kicking off a financial cold war. As all dollars are cleared in the US and the Americans know where they all are – the electronic dollars anyway – this could be done by denying Chinese and Hong Kong banks access to dollar clearing. It would be tricky to implement, but would effectively destroy the targeted banks’ international operations and wipe out the Hong Kong dollar. After all, how can you peg it when you can’t trade it?