Peg warning sends message to Trump

It was the nth time that Hong Kong Monetary Authority chief executive Eddie Yue Wai-man felt it necessary to speak against the notion to delink the city's currency from the US dollar.

The dollar peg - officially known as the Linked Exchange Rate System - affixes the Hong Kong dollar to the greenback at HK$7.80 per US dollar within a bandwidth of HK$7.75-HK$7.85.

Going beyond that would trigger HKMA intervention.

While Yue repeated the official stance that he had stated over and over again since 2022, the city's de-facto central banker was more emphatic this time.

As he rejected the idea advocated by "the father of Lan Kwai Fong" Allan Zeman, Yue took it a step further this time to include a warning that global financial systems were intricately interconnected and that turmoil in one place could quickly spread.

Hong Kong, Yue said, is the most important international financial center in Asia and financial stability is not only crucial to the city's own economy but also to the rest of the region and the world.

Guess to whom Yue was trying to address the message?

Of course, he may be trying to win over Zeman, who had been calling for a Plan B to replace the current dollar peg.

However, it is more likely that Yue was trying to stress to Donald Trump, the incoming US president, the need to preserve the peg for America's own interest as, in terms of Yue's analogy, turmoil in Hong Kong would also backfire on the US.

Trump's second ascendancy to power and the US Congress' criticism of the SAR in relation to Russia have renewed concerns about what the new administration may do to Hong Kong amid the ongoing US-China conflicts.

It is clear from Yue's message that any instability in Hong Kong's financial system would also be harmful to the world and leave no place unaffected, including the US.

It is not advisable for the city to take the initiative to end the dollar peg and replace it with something else.

If it ever has to do so, it should be when the economies here and in the mainland are on a stronger footing.

Ending it now would be like committing suicide financially as Hong Kong-dollar-denominated assets would likely quickly depreciate.

There have been suggestions to link the Hong Kong dollar to the Chinese yuan or a basket of global currencies.

While it is believed that Yue's office must have thoroughly studied all the various options, it can be imagined that if the Hong Kong dollar were to be linked in the near future to the Chinese yuan - which hit a 16-month low yesterday - the Hong Kong dollar would weaken at the same time.

It may be argued that a weak Hong Kong dollar would make the city's exports more competitive internationally, but would the capital flight experienced by the mainland occur in Hong Kong as investors act to protect their assets from depreciation?

Business operators, primarily the real estate developers, would also risk a drastic reduction in valuation as their fixed assets are denominated in Hong Kong dollars.

Zeman may be keen to see a change to the dollar peg sooner rather than later. Fortunately, Yue has emphatically rejected the notion.