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Trump Aides Weigh Proposals to Undermine Hong Kong’s Dollar Peg

Published 07/07/2020, 06:21 PM
Updated 07/07/2020, 06:45 PM
© Bloomberg. Hong Kong five-hundred and one-hundred dollar banknotes are arranged for a photograph in Hong Kong, China, on Thursday, April 23, 2020. Hong Kong's defense of its currency peg to the greenback will likely boost the interbank liquidity pool to a level unseen in two years, lowering local borrowing costs and weakening its dollars. Photographer: Paul Yeung/Bloomberg

© Bloomberg. Hong Kong five-hundred and one-hundred dollar banknotes are arranged for a photograph in Hong Kong, China, on Thursday, April 23, 2020. Hong Kong's defense of its currency peg to the greenback will likely boost the interbank liquidity pool to a level unseen in two years, lowering local borrowing costs and weakening its dollars. Photographer: Paul Yeung/Bloomberg

(Bloomberg) -- Some top advisers to President Donald Trump want the U.S. to undermine the Hong Kong dollar’s peg to the U.S. dollar as the administration considers options to punish China for recent moves to chip away at the former British colony’s political freedoms, according to people familiar with the matter.

The idea of striking against the Hong Kong dollar peg -- perhaps by limiting the ability of Hong Kong banks to buy U.S. dollars -- has been raised as part of broader discussions among advisers to Secretary of State Michael Pompeo and hasn’t been elevated to the senior levels of the White House, suggesting that it hasn’t gained serious traction yet, according to people who discussed the matter on condition of anonymity.

The proposal faces strong push back from others in the administration who worry such a move would only hurt Hong Kong banks and the U.S., not China, they said.

Another person cautioned that the idea of attacking the dollar peg is lower on the list of possible options now under discussion. Those ideas include canceling a U.S.-Hong Kong extradition treaty and ending cooperation with Hong Kong’s police, the person said.

Hong Kong has pegged its currency to the U.S. dollar since 1983, allowing it to fluctuate within a fairly strict band that has generally centered around 7.8 per U.S. dollar.

The very idea that undermining the peg has even been raised offers some insight into the range of discussions now underway for punishing China. The idea has primarily been discussed at the State Department, where Pompeo has emerged as the administration’s loudest critic of Beijing’s recent decision to impose a new national security law on Hong Kong.

Two of the people familiar with the matter said a top administration priority has been finding ways to punish banks based in Hong Kong, particularly HSBC Holdings Plc (LON:HSBA). In a statement last month, Pompeo singled out Peter Wong, the bank’s Asia Pacific chief executive officer, for signing a petition supporting “Beijing’s disastrous decision to destroy Hong Kong’s autonomy.”

What the Hong Kong Dollar Peg Is and Why It Matters: QuickTake

“That show of fealty seems to have earned HSBC little respect in Beijing, which continues to use the bank’s business in China as political leverage against London,” Pompeo wrote in the June 9 statement.

A peg can provide stability but it also puts the city at the mercy of U.S. monetary and fiscal policy. That means it can be less able to respond to local economic conditions because in times of uncertainty, individuals and businesses can opt to hold U.S. dollars over the less widely traded local currency. That would pressure Hong Kong authorities to weaken the peg to maintain competitiveness.

The State Department declined to comment when asked about the issue on Tuesday, as did the Treasury Department.

The possibility of the Hong Kong dollar peg’s demise has become a focus of major financial bets including by Hayman Capital Management founder Kyle Bass, who started a fund last month making wagers on a collapse in Hong Kong’s currency peg, according to people with knowledge of the matter.

Speaking on Monday to Fox News, Pompeo said the U.S. was mulling the possibility of banning ByteDance Ltd.’s social media app TikTok in the U.S., though he didn’t explain what authority the administration would use to do so.

“We’d love to preserve the freedom in Hong Kong; but if we can’t, we’re going to hold the Chinese Communist Party accountable,” Pompeo said.

©2020 Bloomberg L.P.

© Bloomberg. Hong Kong five-hundred and one-hundred dollar banknotes are arranged for a photograph in Hong Kong, China, on Thursday, April 23, 2020. Hong Kong's defense of its currency peg to the greenback will likely boost the interbank liquidity pool to a level unseen in two years, lowering local borrowing costs and weakening its dollars. Photographer: Paul Yeung/Bloomberg

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