How exactly US President-elect Donald Trump plans to deal with the Hong Kong dollar’s peg to the US dollar is not known, but there are jitters tht he may act, just as he did when last President. Mr Trump wants to prevent Hong Kong, and its dollar, becoming the centre of a new financial system which would not use the US dollar as a reserve currency. China, which has now become the world’s biggest economy, wants a system of international trade where the US dollar is not the reserve currency, and specifically, the oil trade, of which China imports vast quantities, should not be carried out in dollars. Another purpose of avoiding the US dollar as a reserve currency, would be to bail out Russia, which is presently groaning under various US sanctions imposed on it after its invasion of Ukraine. It would also reduce US clout in the world if the dollar was no longer the reserve currency. For one thing, it would greatly dilute the impact of US sanctions. Mr Trump sets great store by them, though the empirical evidence is thst they do not seem to work.
Chinese President Xi Jinping’s statement, that the óne country, two systems’model under which Hong Kong was returned to China by the UK in 1997, must be upheld for much longer, is a step in that direction. It must be remembered that China’s previous attempt to make its yuan a reserve currency did not work, not so much because it was premature, as because it meant that the government of the Communist Party of China could not control the cost of capital, nor determine where it was being diverted. Reserve currency status does mean that while other countries work harder to export more if they have a trade deficit, a country like the USA simply simply prints more dollars. That has consequences down the road, but that day’s crisis has been overcome.
However, Mr Trump seems to ignore the fact a currency is only treated as a reserve currency if its country is consistently running a huge trade surplus. The USA has been constantly running deficits for a long time, and has created mountains of government paper held abroad, mostly by China. Asian exporters now want to hold dollars outside of the USA, which makes Hong Kong ideal. The economics of the situation will prove inescapable for Mr Trump, who seems to be trying to fight the inevitable.
