US global strategy affecting capital movements in HK

The United States has adjusted its global strategy and China policy since 2018. This has had a profound impact on capital movements in Hong Kong, which is clearly evident so far in two ways. Firstly, it has triggered the more frequent movement of hot money — both inbound and outbound. The resulting fluctuation in exchange rate between the HK dollar and US dollar has triggered the weak-side Convertibility Undertaking of HK$7.85 to $1, forcing the Hong Kong Monetary Authority to intervene in foreign exchange markets. On March 9, the HKMA sold US dollars for HK currency to maintain the Linked Exchange Rate System; it has only been half a year since the previous intervention.

Since the implementation of the dollar peg in October 1983, the HK dollar for most of the time stayed strong. Among the brief moments when its rate was weak, the Asian financial crisis from the second half of 1997 to 1998 exerted significant pressure on the local currency; it was also the period when the HKMA instituted the weak-side Convertibility Undertaking. Despite the severity of the Asian financial crisis, its repercussions are still not comparable to those caused by the US’s strategic changes. It is foreseeable that the dollar peg system will continue to be under stress in the long run, so much so that the HKMA will need to develop a contingency plan that keeps abreast of the times.

Secondly, in response to the US strategic changes, various investors have begun to adjust their investment and operation strategies in the Hong Kong SAR. Two kinds of adjustments are spotted upon further analysis. On one hand, some foreign and local Chinese consortia will shift their investments, either in whole or in part depending on their evaluation of the market, to other countries or regions. Even if the Sino-US trade war dies down with the two sides reaching a partial agreement, Washington will persistently curb China’s rise while Beijing will fight back against the US’s containment policy. In deciding whether to withdraw altogether or partially from the Hong Kong market, foreign enterprises will assess their country’s relations with China; meanwhile local Chinese consortia will evaluate the situation amid the strained Sino-US ties and trade-offs.

On the other hand, investors from the Chinese mainland will take strategic measures in response to changes in Hong Kong’s existing capital structure. Hong Kong’s integration into the overall development of the country requires stronger mutual investment between the two sides. Such two-way capital flows occur naturally without US strategic changes toward China. But the US containment policy toward China has facilitated such capital movements.

It should be noted that the opposition camp in Hong Kong has come up with a view — with which some people from the industrial and commercial sectors may agree. This attributes the capital outflow and increased financial market volatility to Beijing in defense of the US.

On Nov 14 last year, the US-China Economic and Security Review Commission (USCC) of the US Congress issued its annual report and criticized the SAR government for banning the Hong Kong National Party, refusing to renew the working visa

of Victor Mallet (then vice-president of the Foreign Correspondent’s Club) and the co-location arrangement at the West Kowloon Station of the Express Rail Link. The USCC urged the US Department of Commerce to review the US’ policy on exporting technologies to the HKSAR, claiming Beijing is encroaching Hong Kong’s freedom. Not only has the opposition camp echoed the USCC’s accusation, the American Chamber of Commerce in Hong Kong also, for the first time, voiced their “concerns”.

On Feb 26 and 27, US Consul General for Hong Kong and Macao Kurt Tong warned that the US-China Economic and Security Review Commission would have harsher comments on China in its 2019 annual report. The opposition parties, together with a few prominent figures from the industrial and commercial sectors, echoed these sentiments.

The fact is that the US wants to contain China. The hostility toward Huawei explains the underlying cause of the deteriorating Sino-US relations. If the implementation of “one country, two systems” in the Hong Kong Special Administrative Region of the People’s Republic of China is subject to the assessment of the US, China would have been deprived of its sovereignty over the HKSAR.

It is up to Washington to decide whether or not they grant the HKSAR any preferential treatment. As Hong Kong residents, members of the opposition have to realize that the US-Hong Kong Policy Act is a domestic law of a foreign country, and that Hong Kong’s socio-economic development is not subject to a foreign law.

A prominent local businessman spoke in favor of Am-Cham’s denunciation of the proposed amendments to the Fugitive Offenders Ordinance, alleging that if we do not pay heed to the Americans, their major banks will not establish themselves in the Guangdong-Hong Kong-Macao Greater Bay Area.

This is unfortunately a foolish claim. China’s emergence as an economic power has created divisions in the real economy sectors and in the financial sector. Even if Washington wants to contain China, the US financial sector is still enthusiastic about the huge Chinese market.

“One country, two systems” aims to safeguard national sovereignty, security and development interests, as well as maintaining Hong Kong’s longterm prosperity and stability. While some foreign and local Chinese consortia are downsizing their investment in Hong Kong, mainland capital is readily filling the void and expanding their investment and operations in emerging industries. This trend is underpinned by the central government’s strong support for the SAR to develop innovation and related industries. Indeed, the leading group for the development of the Bay Area recently reiterated the importance of this at its second plenary meeting in Beijing.