Hong Kong’s Chan Says Ready to Defend U.S. Dollar Peg System

(Bloomberg) -- Hong Kong is ready to defend the currency’s link to the U.S. dollar with the support of the mainland, and investors still retain confidence in the system, according to the city’s top financial official.

“We don’t think we need to do any review on the linked exchange rate system,” Paul Chan said in an interview with Bloomberg Television on Friday. “We stand firm to defend it and the country will back us up in the defense of this linked exchange system.”

The flare-up in tensions between the U.S. and China in recent weeks has thrown the focus back on Hong Kong and its role as a financial conduit between the two. U.S. President Donald Trump has threatened to end the city’s special-status privileges, which could potentially include the right to freely trade the dollar to which its domestic currency is pegged.

Hong Kong and the U.S. are seeing a shift in relations due to the ongoing tensions between Washington and Beijing but economic links remain strong, according Chan.

“I would not say this is a decoupling, but this is an adjustment in the relationship between the U.S. and Hong Kong,” Chan said in the interview. “I do believe going forward we will still be enjoying a mutually beneficial relationship.”

Despite the recent turmoil, Hong Kong’s financial system has remained robust, as has the currency. The currency is trading at the strong end of its permitted band as impending public share sales boost demand for Hong Kong dollars.

When asked about the threat of sanctions against Hong Kong and any potential retaliation from the city, Chan said he is aware of the potential and the government will “have to evaluate the impact and what options are available to us” but declined to disclose details.

“I still believe Hong Kong is a very good partner with the U.S.,” he said. “But if the U.S.-China relationship gets tense, well of course we could be under pressure.”

Last month Beijing announced plans to impose national security legislation on Hong Kong. In response, the U.S. government has declared it could no longer certify Hong Kong as autonomous from China, raising concern the city will lose its special trading status.

On Friday, China’s central bank and financial regulator both issued statements backing the national security law plans, and voiced support for Hong Kong’s role as a finance hub. The People’s Bank of China will work to maintain “Hong Kong’s economic and financial stability and prosperity,” according to a statement posted late Thursday on the institution’s website.

Local officials including Chan have tried to reassure the public the legislation will be targeted at only a small number of people who pose a threat to national security. The new legislation will help quell concerns about the ongoing political unrest in Hong Kong, the main threat to confidence in the city’s financial sector, Chan previously said in a May blog post.

Chan said Friday that the response of business people in the city has been generally positive regarding the legislation, and that it’s vital to retain confidence in Hong Kong as a financial hub.

Law & Order

“People do think that law and order, social stability is important,” Chan said. “That will improve our business environment and in the longer term reinforce our financial sector position.”

The prospect of new national security legislation has also revived concern about possible capital flight from the city, a notion that Chan dismissed.

China Inflows May Offset Any Hong Kong Security-Law Fund Outflow

“When I talk to the banks, the private wealth management individuals, in fact there is no obvious outflow of capital,” he said.

When it comes to the city’s economy, which remains mired in recession, Chan said he is hopeful to see signs of a turnaround perhaps in the fourth quarter, but that will depend on external factors including the status of the coronavirus pandemic and the U.S.-China trade relationship. He also promised that a HK$10,000 cash handout pledged in February is “coming soon.”

As for the prospect of further stimulus, Chan said to wait for the current measures to be rolled out before deciding on another round.

©2020 Bloomberg L.P.