The real risk to the Hong Kong dollar peg lies in Washington, not in markets
What is the next step after the US revoked territory's special trading status?
Diana Choyleva is founder and chief economist of Enodo Economics, a macroeconomic, political and geopolitical forecasting company in London focused on China and its global impact. She is also senior fellow on Chinese Economy at the Asia Society Policy Institute's Center for China Analysis.
Speculation about the future of Hong Kong's currency peg has resurfaced, as the Hong Kong dollar recently pressed up against the strong end of its band to the U.S. dollar, prompting the Hong Kong Monetary Authority (HKMA) to intervene forcefully. While markets may be sniffing for signs of stress, the real question is not whether Hong Kong can maintain the peg -- but whether the United States might one day choose to undermine it.
Since 1983, the Hong Kong dollar has been linked to the U.S. dollar. Under the current currency board regime -- introduced in 2005 -- the HKMA maintains the exchange rate within a strict band of HK$7.75 to HK$7.85. This is not a traditional peg. It is a fully rule-based system: every unit of base money must be backed by the U.S. dollar reserves. The HKMA does not conduct discretionary monetary policy; it intervenes automatically when the exchange rate reaches either end of the band.
This discipline has allowed the peg to survive numerous challenges -- from the 1997 Asian financial crisis to hedge fund attacks in more recent years. Even today, with the Hong Kong dollar facing upward pressure, the system is doing precisely what it was designed to do: the HKMA sells Hong Kong dollars, buys U.S. dollars, and expands the monetary base.
Yet there is renewed debate over whether the peg still serves Hong Kong's interests. The city imports U.S. monetary policy even when it is ill-suited to local conditions, especially in the middle of a sluggish property market and a hesitant recovery. Some suggest that a managed float or a basket-linked regime, such as Singapore's, would offer greater flexibility. Others speculate that Beijing may eventually prefer to peg the Hong Kong dollar to the renminbi, to reflect its growing financial influence.
But this view often neglects the bigger picture. Even if the peg is occasionally inconvenient, it is politically and financially indispensable for now.
The peg is embedded in Hong Kong's financial infrastructure. It underpins the territory's asset pricing, mortgage structures, bond market, and its international appeal as a stable financial center. Removing it would not only involve vast operational risk, but also require rebuilding institutional credibility over decades -- no easy task.
More crucially, Beijing has no desire to see the peg abandoned. Despite the political convergence between Hong Kong and the mainland in recent years, Hong Kong retains a distinct monetary and financial system. That separation is not only tolerated by the Chinese leadership -- it is strategically advantageous.
The peg provides China with a gateway to global financial markets, allowing capital to move in and out through a stable, convertible channel, while preserving tight capital controls at home. Pegging the Hong Kong dollar to the renminbi -- a suggestion that occasionally surfaces -- would run counter to this logic. The renminbi is not freely convertible, and such a move would undermine Hong Kong's usefulness to Beijing at a time when China needs all the international capital access it can get.
For all these reasons, the peg remains -- and enjoys support from both sides of the border.
That said, the true vulnerability may lie elsewhere: in Washington. If U.S.-China tensions escalate further, America could choose to target Hong Kong's dollar-based financial infrastructure -- for instance, by restricting access to U.S. dollar clearing or applying financial sanctions under the guise of strategic decoupling.
So far, Washington has shown restraint. While it has revoked Hong Kong's special trading status and sanctioned some individuals and entities, it has not interfered with the HKMA's ability to operate the peg. One reason is practical: disrupting the peg could unsettle global dollar markets. Another is strategic: in the current phase of rivalry, the U.S. seems more focused on curbing China's technological ambitions than its financial reach.
That calculation could change. If tensions deepen and Beijing accelerates the development of alternative financial systems -- such as cross-border central bank digital currency networks -- then Hong Kong's peg could become a more tempting pressure point for the U.S. policymakers.
For now, though, the peg is safe. The HKMA has ample reserves, the rules are transparent, and both Hong Kong and Beijing regard the system as a pillar of financial stability. But the peg's longer-term future may depend not on speculative pressure or domestic macroeconomics -- but on whether Washington remains willing to allow Hong Kong's privileged access to the dollar-based financial system.
As such, the peg remains intact -- not because it faces no challenges, but because it still serves the strategic interests of all parties involved.