Commentary: The US dollar remains crucial to Hong Kong’s prosperity

But one important pillar of Hong Kong’s economy remains unchanged and outside of Chinese government control – its currency, which is pegged to the US dollar via a currency board.

Hong Kong is struggling to deal with sluggish economic growth and myriad socioeconomic challenges, not least increasing levels of poverty and inequality. The city was poised to benefit from legislation passed by the US senate which could force Chinese companies to delist from the US stock exchange. In theory, the dollar peg gives the US the ultimate sanction on Hong Kong. In practice, it is more complicated, not least because the global demand for dollar assets helps subsidise US living standards.

The Hong Kong Monetary Authority , which acts as a de facto central bank, ensures the US dollar trades in a narrow band between HK$7.75 and HK$7.85. So the HKMA will buy up Hong Kong dollars to strengthen the currency when it falls to the lower margin of this band and it will sell them when it gets too strong.Replacing the US dollar with the Chinese Yuan is currently not feasible due to restrictions on the Yuan's deliverability as a currency.

Workers from the advertising sector attend a rally to commence a five day strike, at Chater Garden in Hong Kong on Dec 2, 2019, to demand the government to respond to the five demands of the city's protest movement. Ultimately, neither the security law nor changes in the US stance towards Hong Kong will help the squeeze on living standards faced by many of Hong Kong’s residents.Conversely, maintaining the currency peg gives the Hong Kong government ample fiscal scope to deal with these. Its own economic research indicates the economic impacts of external events on Hong Kong’s economic growth tend to be large but not long-lasting.

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