August 8, 2019 Ben Sapsford

WILL HONG KONG ABANDON THE PEG?

BY GUY CARSON

Hong Kong is in a state of transition. Recent actions from the Chinese have led to social unrest with the key issue being the recent extradition bill. This has been viewed as a sign that China wishes to take more sovereign control over the territory. Despite handing back Hong Kong to the Chinese in 1997, the British and the Americans still view Hong Kong as its own sovereign state. With greater Chinese influence, this may change.

Sitting above this recent tension, is the importance of Hong Kong to China and the shifting nature of the Hong Kong economy over time. Back in the early 1990s, Hong Kong was the largest port in the world and represented over 25% of Chinese GDP. It now represents around 2.5%.

In 2009, China launched the largest ever infrastructure stimulus package the world had ever seen. The buildout of ports across Southeast China has diminished the importance of Hong Kong as an export terminal to the point where it is a net importer of goods.

Hong Kong has transitioned to a financial services hub. It is effectively the capital raising centre for the Chinese economy. There are vulnerabilities though with the banking system currently standing at around 8.5x GDP, making it the most leveraged in the world. Due to the currency peg, Hong Kong effectively imports US monetary policy and the tightening in recent years has started to hurt.

The result has been that Hong Kong has burnt through around 80% of its foreign reserves (called “Aggregate Balance” in Hong Kong) in defending the currency peg since June 2017. If this trend continues some people believe that Hong Kong may be forced to abandon its peg. Kyle Bass of Hayman Capital has written extensively about it here: https://www.centerforsecuritypolicy.org/wp-content/uploads/2019/04/The-Quiet-Panic-in-Hong-Kong-April-2019.pdf

We can’t be sure what will happen but Hong Kong finds itself in a difficult position amongst the current trade war. If you do wish to speak to us about your asset protection needs please get in touch by email here.

Ben Sapsford

Ben Sapsford is Southpac's Marketing Coordinator. Ben is responsible for marketing and promoting Southpac to partners and prospective clients globally.
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