China FX hong kong Markets

Fairly Wacky Ideas.

"It sounds quite radical".

“That’s a nuclear option — it’s unlikely but not impossible”.

“[It] sounds quite radical and will have profound and unpredictable implications not only for China’s banks, but also the US banks and the global financial market”.

“It’s a fairly wacky idea”.


Those soundbites (from economists and traders) give you the flavor of the market’s reaction to news that aides and advisers to Mike Pompeo have floated the idea of undermining the Hong Kong dollar peg as a way of punishing China for the imposition of strict new national security laws in the city.

In short, the market thinks it’s ill-advised, but also profoundly stupid, not to mention self-defeating to the extent it would undercut the US dollar’s credibility and reduce the number of USD transactions given Hong Kong’s status as a major international dollar-trading hub. It’s also not clear it would even work (figure below).

Nevertheless, an attempt to cut Hong Kong off from the USD would effectively mean the end of HKD eventually, irrespective of whether the peg could be technically defended for a time and notwithstanding the myriad logistical nightmares for the US of imposing the necessary restrictions.

Targeting HSBC and Standard Chartered for supporting the new national security law would make more sense for the US, which is why shares sank Wednesday in the wake of the peg chatter. Mike Pompeo recently ridiculed HSBC.

“The US clearing license is vital to HSBC’s global operations and the bank is one of the largest international lenders operating in America”, Bloomberg reminds you. “HSBC is also the largest note-issuing bank in Hong Kong, putting it at more risk than Standard Chartered… should the US limit their ability to buy dollars”.

In any event, the HKD rumor mill wasn’t enough to dent sentiment in mainland Chinese shares, which powered ahead for a seventh session. The recent rally has pushed local equities to some of the most overbought levels since the halcyon days of early 2015, conjuring comparisons to that year’s bubble (and subsequent collapse).

In a testament to — I don’t know, something — Hong Kong shares managed to gain as well, rising despite the geopolitical overhang.

“Yes, this is only some members, and neither Pompeo nor President Trump have yet been given the option to approve”, Rabobank’s Michael Every said of the peg idea.

“However, this is a nuclear bomb being assembled on the table in front of us pointed directly at Hong Kong and US-China relations and the reaction in the Hang Seng today was to rise”, Every went on to marvel. “How can this be the case?”, he wondered. “Because we have post-modern markets. Don’t like facts? Ignore them [and] buy more assets!”

He is, of course, being sarcastic.

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

7 comments on “Fairly Wacky Ideas.

  1. Maybe the Chinese are getting the idea that they’ve beaten Trump on every issue and that whatever his administration tries hurts the US more. One may not like China on human rights, but they have created tne economic miracle of the last 35 years from the cultural revolution to a middle class of 400 million. And they did it all with only the promise of the largest consumer market. Amazing when you realize that when they began they had the people, but the people had no money. Wouldn’t surprise me if Xi would love to see Trump get 4 more years.

  2. As with most wars, the next war will be about economic gain.
    We are either already in or escalating toward WWIII. This war will be unnoticeable to most for a long period of time due to lack of the historical benchmark ( killing each other).
    The long term effects will be very significant.
    Too bad we do not have a leader or allies.

  3. Agree that China would be very happy with Trump remaining in office. He’s compromised, corrupt, and incompetent – a veritable wet dream for China and authoritarians everywhere.

  4. There is no chance of this wacky idea happening anytime soon given that its an election year but that does not mean it cannot be used in a campaign given that most Americans distrust China. To weaponize the dollar funding lever is economic suicide.

    • Never say ‘Never’ as they say. Given what we’ve all witnessed this year, let alone since the 2016 election results, a third Black Swan event would make Omne Trium Perfectum in 2020 almost poetic.

  5. No one does capitalism like the communists…

    • I does seem like Vietnam has gotten pretty good at it as well. Look at the labels in your clothes and shoes.

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