Investment News: will the USD-HKD peg survive ?

As the US is stripping Hong Kong’s special status under US law, one should try to gauge what this specifically means for the territory and for the markets.

HK tech companies could see their exports decline

While most are obviously thinking about trade, that is not where the crux of the matter lies. If anything, exports from HK to the US represent merely 7 to 8% of total exports from HK while US exports to HK are less than 5% of HK’s total imports. Removing the special status HK is enjoying could mean more restrictions on technology transfers towards the territory. The rules applying to China will apply to HK meaning clear export control. HK-based tech companies could bear the brunt of the new situation. This will mainly hit the HK companies that rely on US technology to provide IT services or the like. Mobile telecoms rely heavily on US tech platforms, so it seems.

The USD – HKD peg also at risk

Foreign direct investment into HK is also at risk because lots of USD-linked businesses chose HK as their trading hub knowing quite well that the peg between the HKD and the USD provides safety regarding exchange rate risks. The big question is whether this peg is now at risk. While most will argue that is not the case, it is very important to remember that one of the Asian-based central banks having a Dollar swap line with the Federal Reserve is HK. Indeed, the HK Monetary Authority announced its own $10bio swap facility with the Fed recently. The question is whether because of the loss of HK’s special status, it would also risk losing access to USD reserves via the swap line with the Fed. While unlikely at first, the mere thought that this could happen could put the USD-HKD peg under severe strain. And it could also torpedo one of the main reasons why foreign companies set up shop in HK.

Trade war between US and China enters a new phase

Meanwhile, the phase 1 deal between China and the US is quickly heading towards the dustbin. The Chinese have decided to freeze purchases of US grains as a form of retaliation for what they see as interference into domestic matters, i.e. HK. This could quickly bring back the chokingly high tariffs that prevailed before the deal was closed.

Turning to other points of interest for the markets, this week’s ECB meeting will be closely monitored as the PEPP program could be increased regarding the amounts to be purchased. In the US, besides the ongoing social unrest, jobs data will be of interest. In brief, there is enough the markets can worry about, but there is more than enough liquidity to ‘trump’ it.