In case anyone was curious to know whether the Trump administration is considering extreme measures for punishing Beijing in connection with the new national security law China imposed on Hong Kong, the answer would appear to be “yes”.
Sources familiar with discussions taking place between advisers to Mike Pompeo say some aides have floated the notion of undermining the Hong Kong dollar peg.
Apparently, the idea isn’t anywhere near the top of the list when it comes to the menu of options for retaliating against China, but the fact that it’s been bandied about is notable, to say the least.
Hong Kong has seen enough turmoil over the past year without having to worry about Steve Mnuchin going after the peg.
12 months of protests (interrupted only by the pandemic) cast considerable doubt on the city’s status as a bustling, vibrant financial hub. The imposition of mainland security protocol this month was almost universally decried as the death knell, at least as far as Hong Kong’s status as a beacon of free markets and the rule of law is concerned.
Late in June, the US Commerce department stripped Hong Kong of its special status, and bipartisan legislation calling for sanctions on banks who do business with Chinese officials associated with the new law marked a serious escalation in an already tense Sino-US standoff covering everything from national security to human rights to 5G development.
If Trump moved to restrict Hong Kong’s access to US dollars, it’s not terribly difficult to imagine a scenario where capital flight ensued, setting in motion some kind of nightmarish spiral. (Kyle Bass would surely be delighted.)
“The proposal faces strong push back from others in the administration who worry such a move would only hurt Hong Kong banks and the US, not China”, unnamed sources told Bloomberg, whose Nick Wadhams, Jenny Leonard, Jennifer Jacobs, and Saleha Mohsin cite another source who “cautioned that the idea of attacking the dollar peg is lower on the list of possible options [which] include canceling a US-Hong Kong extradition treaty and ending cooperation with Hong Kong’s police”.
If this sounds like a potentially bad idea to you, that’s because it probably is. It’s one thing to look at options for holding banks accountable for doing business with the “wrong” Chinese, it’s another to declare economic war on Hong Kong, a gambit that could backfire on any number of fronts on the way to spiraling out of control.
“The HKMA has a suite of tools to maintain the peg and if those were insufficient, it is likely to draw on a USD swap line from the PBOC”, Bloomberg’s Mark Cranfield writes, adding that “in the event the costs of defending the peg did become exorbitant, China could always bring the yuan into play”. After all, he goes on to note, “some analysts have suggested the yuan will eventually replace the HKD and the introduction of CNH was an initial step in that direction”.
“Such a move could destabilize USD pegs elsewhere, including US allies around the world, especially those in the Middle East”, AxiCorp’s Stephen Innes remarked. “The unthinkable instability that it would trigger in the USD-based global financial ecosystem could drive a selloff in US equity markets — an outcome abhorrent to the White House ahead of the November election”.
More broadly, the problem is that Beijing would almost invariably hit back, and China has some big financial guns, including a massive hoard of Treasurys and several options for weaponizing the yuan.
Around the same time Bloomberg published their story on the peg, Reuters was out with an exclusive featuring additional news on the TikTok drama.
“The Federal Trade Commission and the US Justice Department are looking into allegations that [the] popular app failed to live up to a 2019 agreement aimed at protecting children’s privacy”, details from the scoop read. “A staffer in a Massachusetts tech policy group and another source said they took part in separate conference calls with FTC and Justice Department officials to discuss [the] accusations”.
This comes a day after Mike Pompeo said the administration was considering banning the app.
“It’s something we’re looking at. Yes”, Trump said Tuesday, in an interview with Gray TV, when asked about Pompeo’s comments.
“It’s a big business”, the president mused. “Look, what happened with China with this virus, what they’ve done to this country and to the entire world is disgraceful. And we are looking at numerous different things. TikTok’s one of them, one of many”.