Tag Archives: de-dollarization

The Nuclear Option: Chopping off Hong Kong from the Dollar System

China and America have begun the fraught business of disentangling their financial systems. Chinese firms with shares listed in New York have rushed to float in Hong Kong, too, after the White House signalled they are not welcome on Wall Street….But now Hong Kong itself, the world’s third-biggest international financial centre, has become a geopolitical flashpoint. Its unique role as the conduit between global capital markets and China’s inward-looking financial system means that both sides must tread carefully.

On May 28, 2020 China said it would enact a new national-security law for Hong Kong, undermining the formulation of “one country, two systems” in place since 1997, under which the territory is supposed to be governed until 2047. In response, America has said it may downgrade the legal privileges it grants Hong Kong, which treat it as autonomous from China

Hong Kong’s place in the world depends on having the rule of law, a trusted reputation and seamless access to Western financial markets. Other Chinese cities have big stock exchanges: shares listed in Shanghai and Shenzhen are together worth a lot more than those in Hong Kong. But neither has fair courts, an independent central bank, free movement of capital or a mix of Western and Chinese firms. These foundations are the basis for $9.7trn of cross-border financial claims, such as loans, that are booked in the territory. Hong Kong is also where mainland Chinese firms and banks go to deal in the dollar, the world’s dominant currency. Some $10trn of dollar transactions flowed through Hong Kong’s bank-to-bank payments system last year.

Until recently, conventional wisdom held that Hong Kong’s position would be assured for 20-30 years, because it would take that long for China either to upgrade its markets to Western standards or to become so powerful that it could impose mainland practices, and the yuan, on the rest of the world. But the trade war, a year of street protests and China’s iron-fisted response to them raise new questions about Hong Kong’s durability. Bullying from Beijing erodes the sense that it is autonomous. And there is an outside chance that America could impose sanctions or other restrictions that would stop some Hong Kong officials, firms or banks from using dollars….. America’s might bring into question whether money parked in Hong Kong is still fully fungible with money in the global financial system. If these worries spread, they could destabilise Hong Kong and cause a financial shock in China and well beyond it.

The good news is that so far there is no sign of capital flight. Hong Kong’s vast deposit base has been stable in recent weeks, say its bankers. Investors are reassured by its $440bn or so mountain of foreign reserves and a long record of capable financial management. The rush of Chinese listings will bring in new cash and drum up business in the city….Nonetheless, for China the prudent policy is to try to speed up the development of the mainland’s financial capabilities so that it is less exposed to potential American punishment…Italso means another big push to boost the global role of the yuan and reduce China’s dependence on the dollar…

Excerpts from Hong Kong: Conduit’s End, Economist, June 6, 2020

China in Latin America

A plan for a…railway across the Amazon, from Brazil’s Atlantic coast to Peru, is among a sheaf of infrastructure projects that China is offering to finance in Latin America. Li Keqiang, China’s prime minister, signed an agreement for a feasibility study for the railway during an eight-day trip through South America that began on May 18th, 2015 in Brazil and took him to Colombia, Peru and Chile…

The same goes for Chinese loans. The $22 billion lent last year outstripped credits from traditional multilateral development banks, according to China-Latin America Economic Bulletin, published by Boston University. Apart from Brazil, the money has mainly gone to Venezuela, Ecuador and Argentina, where it has helped to sustain left-wing governments. Mr Li’s trip suggests a new interest in the business-minded countries of the Pacific Alliance.

Many governments in Latin America have embraced the Chinese dragon as a welcome alternative to the United States and the conditions imposed by the IMF and the World Bank. For a region with huge shortcomings in infrastructure, China’s investment, like its trade, is potentially a boon. But both have pitfalls.  An obvious one is sweetheart deals. In 2014 Cristina Fernández de Kirchner, Argentina’s president, negotiated a currency swap with China, as an alternative to settling her dispute with foreign bondholders. The price is high: the money is tied to 15 infrastructure deals in which Chinese firms face no competition.

Excerpts, The Chinese Chequebook, Economist,  May 23, 2015, at 29