China is moving closer to impose a new national security law in Hong Kong following months of violent pro-democracy protests last year.
This has expats and anyone who can afford to flee Hong Kong and move to other countries. Amidst this, the residents of Hong Kong have been exchanging more and more of their HKD holdings into US Dollars at banks and money exchange counters.
This rush for USD is forcing many exchangers in Hong Kong to turn away hundreds of customers after they ran out of currency amidst the fears that the US could end the preferential status of the city.
Last week, President Donald Trump said the US will end its preferential treatment of Hong Kong as a customs and travel territory from the rest of China. This announcement came just days after the Secretary of State Mike Pompeo said Hong Kong was no longer autonomous from China to warrant special treatment.
China said on Monday that any attempt by the US to harm China will be met with countermeasures.
“Any words or actions by the U.S. that harm China's interests will meet with China's firm counterattack,” said Chinese foreign ministry spokesman Zhao Lijian.
HKD’s 36-year-old peg to the US dollar
There are also fears that the Trump administration might break the 36-year-old peg system that fixes the exchange rate of currency at 7.8 Hong Kong dollars per US dollar. HKD was first pegged to USD in 1983.
City’s finance secretary Paul Chan said on Monday that they have no plans to change its currency peg to US dollar and the Asian financial hub hasn't seen any “obvious” capital outflows yet.
The Hong Kong Monetary Authority (HKMA) along with local banks and investors, all can buy and sell US dollars in the open market.
Moreover, a temporary repurchase agreement was introduced by the US Federal Reserve in March that made it easier for central banks to get USD. This arrangement which is to last six months is part of the efforts to combat the economic effects triggered by COVID-19.
In April, the HKMA introduced a $10 billion liquidity facility to provide all 162 banks in the city with access to USD made available by the Fed.
US dollar is out of stock
Last week, the demand for US currency surged after Chain’s new legislation endorsed to craft a law for Hong Kong that would criminalize acts and activities of secession, subversion of state power, terrorism, and foreign interference.
In response, HK residents rushed to convert their local currency into US dollars, which they view as more stable.
Demand for currency actually increased 10 times last week. More and more customers are looking to switch large sums, “hundreds of thousands or even millions of Hong Kong dollars – at a time.”
“The US dollar is out of stock everywhere. We’ve offered every last bit of our supplies to our customers,” said Eric Wong Wai-lam, who runs Rich Bird Currency Exchange in Sham Shui Po and was forced to turn away 600 customers.
Residents are also looking for alternatives like the pound, Euro, and Australian dollar. “People will take anything you have,” he said.
City’s largest banks, HSBC also had some of the automated teller machines run out of US dollars.
Increased adoption for Bitcoin and Stablecoins
Last year, when protests surged in Hong Kong, the city turned to bitcoin, which traded at a premium. On Paxful, the demand for BTC in the city has been growing throughout 2020 which like last time could see another spike.
Now that there are uncertainties over the city’s economic future, Hong Kong residents may flock to the decentralized, censorship-resistant cryptocurrency and even to USD pegged stablecoins which have been seeing immense adoption during the recent market sell-off.
During the first quarter of 2020, as the USD became a hot commodity so did the stablecoin in the crypto market. One of the reasons for the increased adoption of USD-pegged digital currencies was the global shortage of US dollars.
Moreover, the stock and crypto market could see the effect of the US-China jitters, although for now, both are stable.