The Hang Sang sold off 1.05% today as the United States started revoking Hong Kong’s special status, which it has held since the UK handed control of Hong Kong to China in 1997.

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First, what is Hong Kong’s special status?

Since the handover, the United States has recognized Hong Kong as having a separate legislative body under the United States-Hong Kong Policy Act of 1992. This has provided Hong Kong with what most regarded as a “special status” independent from China. Hong Kong have enjoyed specific benefits that Mainland China does not have access to, such as lower trade tariffs and separate customs. This special status has spared Hong Kong from the U.S. China trade war.

Hong Kong’s special status is contingent on China continuing to let Hong Kong remain autonomous. However, the likelihood of that continuing to happen is slowly fading away after China has formally approved a plan to impose a national security law on Hong Kong. This law will override Hong Kong legislation and are intended to target “splitters, subversion of state power, terrorism or interference by foreign countries or outside influences.”

However, some countries – specifically the United States, do not believe that Hong Kong will remain autonomous. They have started the initial process of revoking their special status, with the United States Commerce Department stating that any “regulations affording preferential treatment to Hong Kong over China, including the availability of export license expectations, are suspended.” Furthermore, former Hong Kong Governor Chris Patten sees China attempting to end “one country, two systems.”

 

What will the effect be on the US?

Currently, over $17 Billion worth of goods gets exported to the United States. If the special status gets revoked and Hong Kong is subject to the current tariffs Mainland China is, this may mean U.S. citizens on higher prices for Hong Kong goods.

 

Is there any threat to the HKD/USD?

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Hong Kong Monetary Authority Foreign Reserves

For now, there should be no reason to think the Peg should fail in the medium term. The Hong Kong Monetary Authority (HKMA) still has $441 Billion Foreign Reserves or doubled the amount of Hong Kong dollars in circulation. Even if their foreign reserves are depleted, China has promised to provide their full $3.23 Trillion foreign reserves to ensure the stability of the Peg. The USD/HKD stands at the strong end of the Peg, at $7.75.

Not everyone is so optimistic about the Peg, however. Kyle Bass, the founder of Hayman Capital, has warned of the “impending crisis” with regards to the Hong Kong Peg, shorting the Hong Kong Dollar using long-dated options.

Are you looking at the Hong Kong Economy?

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