Trump’s impending conflict with China puts the Hong Kong dollar peg at jeopardy.

Hong Kong will likely feature prominently in the wider trade, security and geopolitical tussle between the United States and China under Donald Trump’s incoming second administration. If so, the Hong Kong dollar’s peg to the US greenback could come under US fire.

Trump is expected to take a new approach to Hong Kong-related issues, from the city’s role in helping Russia procure dual-use Chinese products and bypass Western sanctions to the arrests of pro-democracy activists and politicians to the financial hub’s role in alleged money laundering inimical to US interests, according to some observers.

Before Trump resoundingly won the US presidential election on November 5, the former president vowed to get pro-democracy activist and media tycoon Jimmy Lai out of prison. Lai, who stands accused of fomenting Hong Kong’s 2019-2020 unrest, is apparently one of Beijing’s bargaining chips on the negotiation table between Chinese and US leaders.

The situation got more complicated after Hong Kong’s national security police on Christmas Eve issued arrest warrants for six more overseas Hong Kong activists and accused them of inciting secession, subversion and colluding with foreign forces. The police also imposed HK$1 million (US$128,425) bounties on each of them.

The six include young activists Tony Chung and Chloe Cheung, political commentators Chung Kim-wah, YouTuber Victor Ho, former district councilor Carmen Lau and former actor and singer Joseph Tay. Ho and Tay are in Canada while the others are in the United Kingdom.

Hong Kong’s Security Secretary Chris Tang said the six had endangered national security by giving speeches, posting on social media and lobbying foreign governments to sanction Hong Kong officials and judges.

As of December 25, the Hong Kong police have issued arrest warrants for 19 people on suspicion of committing national security offenses.

Chris Patten, the last governor of Hong Kong and a patron of United Kingdom-based Hong Kong Watch, said the Hong Kong government’s “relentless pursuit of pro-democracy activists beyond its borders is a blatant overreach that disregards international norms.”

He called on the UK, US and Canadian governments to “act decisively and in concert to shield these activists from transnational repression, ensuring their safety and standing firm against Beijing’s attempts to undermine the very democratic values we hold dear.”

Financial crime hub
The new arrest warrants may provide more fuel for hawkish American lawmakers to advocate for more sanctions against Hong Kong officials and companies or even more extreme measures such as the removal of some Hong Kong-based banks from the SWIFT financial transfer system, which if implemented could trigger a de-pegging of the Hong Kong dollar and to the US buck.

John Moolenaar, chairman of the US House Select Committee on the Chinese Communist Party (CCP), sent a letter to US Treasury Secretary Janet Yellen in late November to express the committee’s “deep concern” regarding Hong Kong’s alleged “increasing role as a financial hub for money laundering, sanctions evasion and other illicit financial activities.”

“In the wake of the National Security Law of 2020, which subjected Hong Kong to the rule of the CCP, Hong Kong has shifted from a trusted global financial center to a critical player in the deepening authoritarian axis of the People’s Republic of China (PRC), Iran, Russia and North Korea,” he wrote.

“We must now question whether longstanding US policy towards Hong Kong, particularly towards its financial and banking sector, is appropriate.”

Moolenaar said the US Treasury has taken preliminary action against entities based in Hong Kong, where the city has now become a global leader in practices such as importing and re-exporting banned Western technology to Russia, creating front companies for purchasing barred Iranian oil, facilitating the trade of Russian-sourced gold and managing “ghost ships” that engage in illegal trade with North Korea.

He said the committee wants to know how the US Treasury will combat the facilitation of money laundering and sanctions evasion through Hong Kong’s financial system.

Jesse Baker, assistant to the US deputy treasury secretary, met with Hong Kong financial institutions, including HSBC, StanChart and Bank of China (Hong Kong) in Hong Kong on December 11, warning them not to engage businesses with Russia or help Russia evade western sanctions, Nikkei reported.

In fact, after Beijing implemented the National Security Law in Hong Kong on June 30, 2020, Trump held a meeting with his top officials to decide the United States’ response.

At the time, Trump had considered forcing an end to Hong Kong’s peg policy, but opted against the move due to commerce and treasury officials’ opposition. Instead, he signed an executive order to end Hong Kong’s special status.

Over the past four years, the Biden administration has not discussed de-pegging the Hong Kong dollar from the US greenback.

In November 2022, markets fretted that Hong Kong’s peg policy would end as the city’s currency had repeatedly touched 7.85 per US dollar, the lower end of the allowed peg range of 7.75-7.85, amid rising US interest rates.

At that time, billionaire investor Bill Ackman bet that the Hong Kong dollar would fall and that its peg to the US dollar would break. Veteran Trader Boaz Weinstein said he bet against the Hong Kong dollar in a 200-to-1 payoff potential.

De-pegging debate
Some Hong Kong commentators said they don’t think the de-pegging will happen soon unless a war in the Taiwan Straits suddenly breaks out. However, they did not rule out the possibility of de-pegging in the future.

Vincent Lam, a Hong Kong-based fund manager and financial columnist, wrote in an article that it’s unlikely that Trump will take action to stop Hong Kong from using US dollars as this does not align with US interests. Lam noted Trump has vowed to impose a 100% tariff on BRIC countries that pursue de-dollarization schemes.

However, he added that if the Hong Kong government does not improve its balance sheet, it runs the risk of depleting its fiscal reserves of HK$550 billion and will thus have to give up its peg policy within years. He said if this happens, Hong Kong can peg its dollar instead to a basket of global currencies to maintain financial stability.

Allan Zeman, founder of Lan Kwai Fong Group, said in a recent interview that the Hong Kong government should have a plan B for its currency peg policy.

He said if US inflation and interest rates remain high in the Trump 2.0 era, a peg to the US dollar will hurt Hong Kong’s competitiveness and economy. He said a de-pegging may be good for Hong Kong in this case.

Charles Gave, founder of the Hong Kong-based Gavekal research group, said in an article that Hong Kong could become the potential nucleus of a new international financial system in the coming few years.

He said many Asian exporters have kept their earnings in Hong Kong in recent years, resulting in an increase in US dollar reserves in the city. He said if these deposits were to be converted into Hong Kong dollars and lent to borrowers in Asian countries, a new pyramid of US dollar-denominated credit would emerge over which US authorities would have no oversight.

On December 21, Bloomberg published a commentary with the title “Hong Kong may be fresh flashpoint in Trump’s fight with China.” The writer opined that as Trump does not like being told he has no say over something, he may look into Hong Kong’s peg policy again.

Yong Jian is a contributor to Asia Times. He is a Chinese journalist who specializes in Chinese technology, economy and politics.