With Hong Kong being annexed by China, does it make sense anymore?
The question of the Hong Kong Dollar (HKD) peg’s viability is at the intersection of high finance and tense geopolitics. While Hong Kong’s political autonomy has significantly diminished, the Currency Board System that governs the HKD remains intact for two primary reasons: financial stability and the immense economic disruption that breaking the peg would cause.
What is the HKD peg, and why does the US care?
The Hong Kong Dollar is linked to the US Dollar (USD) through a Currency Board System established in 1983[1]. This system is non-negotiable by the US; it is unilaterally managed by the Hong Kong Monetary Authority (HKMA).
- The mechanics: The HKMA is obliged to maintain the exchange rate within a narrow band of HK2$7.75 to HK$7.85 per US$1[2][3]. To enforce this, every Hong Kong Dollar in circulation must be backed by a corresponding US Dollar in Hong Kong’s official reserves. This rigorous backing mechanism is what gives the HKD its credibility and stability.
- US interest: The United States views the stability of Hong Kong as crucial for regional and global trade[4]. Despite the sanctions imposed following the introduction of the National Security Law (NSL), the US Treasury Department and the Federal Reserve have generally avoided measures that would directly undermine the peg. The primary concern is that breaking the peg would:
- Trigger a massive capital flight from Hong Kong.
- Cause a sudden, severe financial shock to global markets.[5]
- Hurt US companies and investors who rely on Hong Kong’s capital flows.
In short, the US tolerates the peg because the costs of breaking it currently outweigh the geopolitical benefits.
The annexation factor: Arguments against the peg
The user is correct to question the peg’s rationale, given China’s increasing political control. The original justification for the peg was that Hong Kong was a free and autonomous global financial center—a “safe harbor” with a stable currency, rule of law, and free capital flows, distinct from the heavily controlled Chinese Yuan (CNY).
The arguments for terminating the peg, or for the US to actively challenge it, center on the idea that this rationale no longer holds:
Why the peg endures: The hard reality
Despite the compelling geopolitical arguments for challenging the peg, its continuation is rooted in financial pragmatism.
1. Stability and resilience
The HKMA has repeatedly demonstrated that the peg is technically sound and robust.[6]
- Massive reserves: Hong Kong holds enormous US dollar reserves—among the largest in the world per capita—specifically for defending the peg.
Any attempt to break the peg would involve a massive, sustained attack on these reserves, which the HKMA is well-equipped to manage. - Defense mechanism: When the HKD exchange rate hits the $7.85 limit, the HKMA buys HKD and sells USD to push the rate back down. When it hits $7.75, it sells HKD and buys USD. This mechanism is automatic and effective.
2. Global trade and capital mobility
Hong Kong serves as the major conduit for trade and capital between China and the rest of the world.[7]
- A stable currency is essential for this role. If the peg were broken, volatility would explode, freezing trillions of dollars in trade finance and investment, impacting everything from multinational corporations to local manufacturers.
- The peg is the backbone of Hong Kong’s status as a free port, ensuring capital can flow in and out without mainland restrictions.
3. China’s calculus
China has a vested interest in maintaining the peg.
- USD access: The peg ensures that a major city under its jurisdiction has unimpeded access to the USD-denominated global financial system. This is critical while the Chinese Yuan (CNY) remains non-freely convertible.
- Political signal: Allowing the peg to break would be an enormous loss of face and would signal a complete breakdown in the “one country, two systems” structure to the global business community, accelerating the shift of financial activity away from the region.
Conclusion: Geopolitical Risk vs. Financial Stability
The continued existence of the HKD peg is a clear example of financial stability triumphing over geopolitical tension.
The US has essentially adopted a policy of strategic patience: while it condemns the erosion of autonomy, it is unwilling to risk the global financial fallout that a direct challenge to the peg would entail. The peg is politically compromised, but financially resilient.
Ultimately, the HKD peg is less about the US supporting Hong Kong’s autonomy and more about the US avoiding an economically painful, self-inflicted wound.
The system will likely only end if:
- China decides to end it (e.g., by attempting to fully merge the HKD with the CNY, which is unlikely due to the CNY’s capital controls).
- The HKMA runs out of reserves (highly unlikely given their size).
- The US determines that the peg has become a national security liability that outweighs the risk of financial market chaos.
Do you think China’s increasing control will eventually force major financial institutions to relocate, regardless of whether the peg holds?
Reference:
[1] The remarkable resilience of Hong Kong’s exchange rate regime – Feb 11, 2022, Banque de France
[2] 2013 Investment Climate Statement – Hong Kong – US Dept of State
[3] Statement from AmCham HK — Hong Kong amidst the Current Global Trade Challenges – Apr 14, 2025, AmCham
[4] Hong Kong Dollar Peg: How vulnerable is it and if it breaks, how will it happen? Explained – Jun 19, 2020, ForexCrunch
[5] Linked Exchange Rate System – Hong Kong Monetary Authority
[6] Hong Kong’s Advantages – HK to London
[7] Understanding the Hong Kong Dollar: What You Need to Know – May 10, 2025, Remitly
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