Again today the US dollar comes to the rescue of Hong Kong
Well, that is neither more nor less the reason that the Hong Kong currency today is not falling apart with the troubled socio-economic situation on the island: the US dollar. As in 1997, the iron parity that the economic authorities of the island are holding against the dollar is acting as an economic lifeguard. What is another country would have led to a deep dive of its currency, causing multiple collateral damages throughout the economic fabric, in Hong Kong, it is not being so thanks to the US currency?
The parity of the Hong Kong currency with the US dollar dates back decades when in 1983 it was established by the country’s economic authorities amid a sharp devaluation of its currency in international markets. This was in the heat of the beginning of the Chinese-British talks regarding the political transfer of Hong Kong to the communist giant. In just one year the dollar, Hong Kong depreciated 30%, which decided the island authorities to adopt the new currency parity policy. Every Hong Kong dollar was backed by a US dollar, and all those millions of US dollars were guarded as reserves in the then still British colony.
This real and 100% physical parity, without cheating or cardboard, is what saved the Hong Kong dollar from speculative attacks in 1983, saved him again from the currency devaluation of the Asian tigers crisis, and the one that can save him now of the great uncertainty that grips the island, after its political-social deterioration imposed from Beijing to the elimination of fundamental civil and democratic rights. In fact, the island’s total dollar reserves double its monetary base, so that parity is well guaranteed.
Actually, in the annals of economic history, there have been many parties with the US dollar that have ended up being resoundingly failed. Without going any further, it was that parity of the Argentine peso to which Medem so scandalously ended a few decades ago, and snatching from the Argentine savers their US dollars to exchange them for a very devalued Argentine pesos. But the recipe for Hong Kong’s success is in the unwavering discipline with which they have professed their peer philosophy for decades. Indeed, in Hong Kong, they have been very diligently disciplined, and it has not been allowed under any circumstances to print money that was not backed up bill by bill with US dollars, in addition to being forced to let their monetary base fluctuate with capital flows.
But not everything is unwavering guarantees, something that the most experienced readers already know: in the financial world, absolute security never (never) really exists. And it is precisely in a situation like the one that is currently lived in Hong Kong with which one can come to think of something that can break parity, however solid it may be. While it must be said that Chinese capital controls are very important in mainland China, it is precisely a massive exodus of capital that can disrupt the Hong Kong system, by taking reserves to dangerous levels in order to guarantee parity.
If the capitals begin to flee massively from Hong Kong, that would stress the exchange markets and the reserves to the limit, being able to blow up the entire peer system. Because keep in mind that in Hong Kong the same restrictions on capital movements as in the rest of China do not apply (yet), and from Beijing, the monetary rules and capital controls are granted significantly more lax than on mainland China. There is therefore much more freedom of capital flows, the scenario of massive capital flight can perfectly occur, and there are no such severe restrictions there especially because Hong Kong is a financial hub that must continue working on the day with the entire Asian region.
Nor are they all advantages in parity, since, when you make your one-to-one currency dependent on the US dollar, you are inevitably implicitly and explicitly subjecting yourself to the monetary policy dictated by the US Federal Reserve, losing a good part of your ability to act. local monetary policies. It goes without saying that these local monetary policies would be established much more in line with the reality of the Hong Kong economy than those of the Fed, whose interest rate variations run the risk of corresponding to Hong Kong’s real monetary needs “like an egg to a chestnut. ”
Today, it is unlikely (for now) that China decides to end the parity of Hong Kong or its capital flows because of that character of the main financial hub of the entire region. The Hong Kong financier lives mainly from it, and ending this activity would mean the ruin of the island and a succulent source of income also for Beijing’s elites. But really, in the colossal times that Hong Kong Island currently lives, nothing (absolutely nothing) is disposable. In a matter of weeks, we can perfectly see a perfect financial storm unleashing, which encourages that massive flight of capital that is the one that can truly end the stability that the dollar’s parity has printed on the island, and that has put it for now to except for turbulence due to the unfortunate current socioeconomic situation.
In the face of such a financial exodus, China would have to face the inscrutable dilemma between ending Hong Kong’s economic model and strictly restricting capital movements or allowing capital flight to destroy the island’s economy as well, by subjecting tension unbearable to the financial system and the parity with the dollar that has given them so much economic stability for decades. And keep in mind that the high outgoing flows of Hong Kong have already ignited all the alarms, and there is already a clear flight of capitals that leave terrified. What has really changed now in Hong Kong so that the success model for decades is threatened to become unsustainable now? Plain and simple the difference has been a democracy, or rather, the suppression of it, which has caused the people of Hong Kong to rebel massively causing seismic waves not seen before. As you can see, socioeconomics in their purest form.
But what is really paradoxical about today’s issue is that, in a context of open and unarmed trade war between the US and China, and it is also the Chinese government that is trying to squander the democratic and legal rights of those who were enjoying the Hongkongers, it is precisely the US currency that is avoiding the economic debacle of the former British colony. It is surely a reason why the people of Hong Kong welcome the economic influence of the United States, against the socio-economic totalitarianism that they intend to impose on the little by little from the elites of Beijing, and against which the people have risen. In the end, the economy is what it has: even politically, citizens end up valuing a system in which they can earn a decent living and that gives them stability in every way, and so they end up respecting in another respect more democratic values so fundamental that (still) we have in the West.