Email of the day on Hong Kong
Comment of the Day

April 26 2023

Commentary by Eoin Treacy

Email of the day on Hong Kong

As a HK subscriber to your excellent service, I like to give a few on the grounds observations. In my view, the reason why LVMH is making the shift is 1) China opened Hainan tax free shopping and Shenzhen also exploring the same makes shopping high end products less unfavorable in the mainland. 2) Chinese tourist since reopening find HK less attractive relatively for tourism than before.

On HK becoming just another Chinese city, on recent trip to UK, found some general public perception of HK over the last few years seriously incorrect, I suppose due to the sensational and misleading journalism on HK from the press in the west. While there are changes in HK in last few years, that it is becoming another Chinese city I think is very much misplaced.

On the HKD peg, from what I heard from current and prior HK central bank chiefs and top officials from PRC, there is no desire or rationale to change the peg for the foreseeable future. Also that HKD in circulation is back by about 5X USD reserve and that the peg is setup unilaterally by HK, risk of interference by US due to geopolitical concern is low.

Eoin Treacy's view

Thank you for this generous and insightful email and your kind words. The efforts underway to boost the international credentials of Shenzhen, Guangzhou, Macau and Hong Kong to create a “Bay Area” innovation hub to rival Silicon Valley were the stated government policy ahead of the pandemic and the introduction the security law. That’s as much about making more of the mainland cities look like Hong Kong as it is about folding the Hong Kong economy into the wider region’s.

Hong Kong tourism was always more about shopping and food than big tourist sites. The fact it has competition on those fronts is symptomatic of the transition that is underway. When I think about Hong Kong becoming just another Chinese city, it is in the context of Chinese cities becoming more vibrant and technologically advanced. That’s more of a levelling up than a downgrade but the free-wheeling capitalism and intellectual freedom for which Hong Kong is known will be harder to sustain.

I don’t believe Hong Kong’s government will ever need to drop the peg because it does not have the financial resources to sustain it.  However, the trend of action from Beijing is towards greater control. The existence of the Hong Kong Dollar is incompatible with the long-term aim of the Communist Party. The risk is not that the US will interfere with the peg, it is whether the Communist Party will allow the peg to continue to exist. I agree that is not a present risk, but it is inevitable.

As China does more trade in renminbi and encourages use of its own payments network, the rationale for holding the peg will be increasingly less convincing. 

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