Attack The Peg? Trump Administration Ponders Nuclear Option For Hong Kong Retaliation

Attack The Peg? Trump Administration Ponders Nuclear Option For Hong Kong Retaliation

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”.

Read more: ‘Cold War 2.0’ Isn’t Going To End. No Matter Who Is President

9 thoughts on “Attack The Peg? Trump Administration Ponders Nuclear Option For Hong Kong Retaliation

  1. In a world that is internalising many of the basic tenets of MMT, is it still fair to say that China wields a big stick vis-a-vis its hoard of Treasury holdings? What would stop the Fed from simply buying everything and more that China was looking to offload.

    1. To your first question: NO. Look it up. We the USA own more than half of the debt issued by the Treasury. If
      China needs to sell their holdings to raise US$, there are plenty of buyers, including the FED of course. There are things to worry about but China unloading their US treasury holding for a profit ain’t one of them.

    2. Absolutely nothing. China holds some real options like for example banning exports to the US. China would need to pivot hard to internal consumption but it would be a move. Imagine the US in 6 months with no consumer goods. Of course then China will be sitting next to an India who has absolutely no problem getting militarily involved because the US no longer cares what happens to Chinese manufacturing capacity.

  2. “Look, what happened with China with this virus, what they’ve done to this country and to the entire world is disgraceful.” What China did was indeed disgraceful: they bungled the chance to contain SARS-CoV-2 at the source in the crucial first days of the epidemic. But the last time I checked, the Commander in Chief of the United States military was in charge of protecting the country from external threats. He failed spectacularly. And this was not a fluke: His entire presidency has led up to this moment. A weakened, desperate, anti-scientific leader who has alienated his allies, is now presiding over a weakened country, unable to respond to a global rival. He probably doesn’t understand irony, but Donald Trump, the man who vilifies China, has succeeded in promoting China’s rise beyond Xi’s wildest dreams. Ban Tik-Tok in exchange for subduing Hong Kong? Sure. Declare victory.

  3. For anyone who has been around when Japan was the object of ire in the late 1980s, the specter of a large holder of Treasuries possibly dumping the market is nothing new. It is an empty threat because it is self defeating as it increases the value of the domestic currency which then causes competitiveness issues for export oriented parts of ones economy.

Speak your mind

This site uses Akismet to reduce spam. Learn how your comment data is processed.