Trump aides weigh proposals to undermine Hong Kong's dollar peg

[WASHINGTON] Some top advisers to President Donald Trump want the US to undermine the Hong Kong dollar's peg to the US 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 US 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 opposition from others in the administration who worry such a move would only hurt Hong Kong banks and the US, 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 US-Hong Kong extradition treaty and ending cooperation with Hong Kong's police, the person said.

Hong Kong has pegged its currency to the US dollar since 1983, allowing it to fluctuate within a fairly strict band that has generally centered around 7.8 per US dollar. The currency has remained strong due to its yield advantage over the greenback, demand for Chinese company share sales and persistent flows into the local equity market.

The city's de facto central bank intervened to defend the peg to the greenback Tuesday, selling HK$10.3 billion (S$1.81 billion) worth of local dollars. That takes the total since it began intervening in April to HK$75.1 billion. The currency traded at 7.7501 per dollar on Wednesday, or just one pip away from the strong end of the trading band.

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The very idea that undermining the peg has even been raised offers some insight into the range of discussions now underway for punishing China. It has primarily been discussed at the State Department, where Mr 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.

In a statement last month, Mr 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."

"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," Mr Pompeo wrote in the June 9 statement.

A peg can provide stability but it also puts the city at the mercy of US 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 US 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. Hong Kong's financial secretary, Paul Chan, referred queries to the Hong Kong Monetary Authority, which didn't immediately reply to a request for comment. The People's Bank of China in Beijing also didn't immediately reply to queries.

Mr Chan said early last month that China's central bank could provide American dollars should the U.S. impose sanctions on the territory. The dollar peg is underpinned by about US$440 billion of foreign-exchange reserves, which is more than two times the city's money in circulation, he told China Central Television.

If needed, Mr Chan added, Hong Kong could tap a currency swap line with the People's Bank of China, which would cover Hong Kong dollars and the greenback.

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.

"It's a fairly whacky idea that they would be able to force Hong Kong off the peg by some means," said Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce. "I've been against the idea that Kyle Bass and others trying to break the peg - that has been a spectacularly unsuccessful idea so far, and I expect it to be the same."

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

"We'd love to preserve the freedom in Hong Kong," Mr Pompeo said. "But if we can't, we're going to hold the Chinese Communist Party accountable."

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