Hong Kong’s Dollar Peg System Under the City’s Present Political Turmoil

US legislation that paves the way for diplomatic action and sanctions against Hong Kong could potentially threaten the city’s exchange rate peg and long-term status as a financial centre, analysts said.

The Hong Kong Human Rights and Democracy Act, which was signed into law last month by US President Donald Trump, increases scrutiny of Hong Kong’s economic and political systems, and its passage comes during a time of unprecedented unrest in the city.

Among other mandates, it allows the US State Department to suspend Hong Kong’s special trading status based on whether the city retains a sufficient level of autonomy under the “one country, two systems” principle.

The United States has treated Hong Kong as a separate entity from mainland China since 1992, granting it special economic privileges, such as the free exchange of the 

US dollar with the Hong Kong dollar, and access to sensitive technologies. Exports from Hong Kong are also exempt from trade war tariffs that have been applied to the mainland by Washington.

Most analysts say there would need to be a massive intervention from China for the US to revoke Hong Kong's status, given the negative impact it would have on the city rather than the mainland. But many agree it now gives Washington another source of leverage in its escalating competition with Beijing.

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