Question

How does Hong Kong national security law affect Hong Kong fixed exchange rate system?

Answer 1

China has passed a wide-ranging new security law for Hong Kong which makes it easier to punish protesters and reduces the city's autonomy. Other countries are opposing this law. US and China's relations are under stress.

The Hong Kong dollar has been pegged to the greenback since 1983, and trades at a tight band of $7.75 to $7.85 Hong Kong dollars per U.S. dollar. When it veers too close to either end, the city's de-facto central bank — the Hong Kong Monetary Authority (HKMA) — would intervene by selling or buying the currency.

The 36-year Hong Kond Dollar peg is coming under some strain amid worsening Sino-American relations. While the local currency seems insignificant for the world, the city-state's function as the world's No. 3 center for foreign exchange and its role as a conduit between the US and China make such a potential collapse monumental.

The probability of such a move are low, but the ramifications could be massive. The US presidential elections in November pose the highest risk for the narrow 7.75 to 7.85 USD/HKD range

Trump administration could undermine the peg by limiting Hong Kong banks' ability to purchase U.S. dollars.US is unlikely to do anything to hurt the peg as, it could put at risk the vast amount of assets held by China, particularly Treasuries.

Beyond the technicalities of the law, Hong Kong is more than able to defend its currency even if Washington seeks to limit its ability to buy dollars, Amundi analysts say. The Chinese territory holds $440 billion in dollar-denominated foreign currency reserves — double the size of the city's entire monetary base, they say.

So there are more chances that it wont affect Hong Kong's exchange rate.