Commentary: How the Shifting Sands of Global Finance May Favor Hong Kong

In early May, the Hong Kong dollar briefly hit the strong-side limit of its trading band against the U.S. dollar, prompting intervention by the Hong Kong Monetary Authority. The authority injected HK$129.4 billion (about $16.5 billion) of liquidity to maintain the currency’s peg. This move resulted in a near-tripling of the local banking system’s aggregate balance and a sharp drop in the Hong Kong Interbank Offered Rate (Hibor)[para. 1][para. 2]. At the same time, Chinese battery giant CATL completed a HK$35 billion initial public offering in Hong Kong, representing the largest global IPO since 2023[para. 3]. These events signal a recovery in market liquidity and rising investor confidence in Hong Kong, even as U.S. investor participation has declined[para. 4].

Amid global shifts, the U.S. dollar has weakened in 2024, contributing to a broader “de-dollarization” trend as countries seek to diversify away from dollar assets, especially following tariff hikes. This trend is expected to result in the repatriation of funds from dollar assets to markets in Asia, the Middle East, and the EU. As one of Asia’s most liquid offshore markets, Hong Kong is well-positioned to benefit from this shift[para. 5].

U.S.-China tariff policies have raised doubts about the credibility and stability of U.S. economic policies, increasing global trade costs, accelerating deglobalization, and eroding the U.S. dollar’s status as a reserve currency[para. 7][para. 8]. The resulting reallocation of institutional investments is likely to increase global market volatility and exert further downward pressure on the dollar[para. 8].

In contrast, the Chinese yuan is strengthening, supported by China’s manufacturing strength and trade surplus. Over the past decade, more than $1 trillion from Chinese institutions and exporters has been allocated to dollar assets; a weaker dollar cycle now compels these investors to reconsider their allocations[para. 9].

For Hong Kong, a weaker dollar relative to the yuan boosts competitiveness versus the Chinese mainland and loosens domestic financial conditions, leading to reinflation and supporting rising asset prices[para. 10]. Since Hong Kong’s currency is pegged within a tight band to the U.S. dollar, while the Chinese mainland is its main trading partner, yuan movements strongly affect Hong Kong’s competitiveness and financial environment. A stronger yuan causes the Hong Kong dollar’s effective exchange rate to fall, easing monetary conditions locally[para. 11]. Because Hong Kong lacks independent monetary policy, it absorbs shocks through fluctuating prices and property values, amplifying asset volatility[para. 12][para. 13]. Improved liquidity and lower borrowing costs could further reinforce asset price increases[para. 15].

Since the 1990s, surplus economies like China, Japan, OPEC, and ASEAN have accumulated large dollar reserves; China alone has amassed a $7.1 trillion goods surplus with the U.S., equivalent to 38% of its 2024 GDP. As the dollar depreciates, these countries are motivated to adjust their currency holdings, resulting in major reallocation away from U.S. dollar assets[para. 16]. Hong Kong stands to benefit as a primary destination for this reallocated capital, particularly as demand grows for offshore Chinese assets[para. 17]. Many Asian financial institutions remain heavily exposed to dollar assets – Japanese banks hold 6% of their assets in foreign currencies, and Taiwanese insurers have 61.3% of assets overseas[para. 18]. As this capital returns, Hong Kong is expected to see rising asset prices and market activity[para. 19].

Though de-dollarization may temporarily heighten volatility in U.S. and Hong Kong assets, Hong Kong’s fundamentals and capital inflows should support its market resilience. In Q1 2024, Hong Kong’s real GDP grew 3.1% year-on-year, with ongoing capital inflows sustaining its market liquidity[para. 20][para. 21].