One Country, Two Currencies
Hong Kong's dollar peg is at once Beijing's greatest financial asset and its biggest obstacle in the race to dethrone the dollar
Regular readers will know that China’s monetary strategy has become something of an obsession at Currency of Power. Over the past few months, we’ve traced how the petrodollar recycling loop is breaking, mapped the great bifurcation between dollar and yuan financial infrastructure, argued that the dollar has more lives than its critics admit, and tried to understand what it actually means when a country is wide open to the world and locked into a single system at the same time. We’ve also had the pleasure of going deep on the People’s Bank of China with the brilliant Sinéad O’Sullivan, whose four-part series on Chinese central banking is essential reading for anyone trying to understand how China’s monetary system actually works.
This piece grew out of something more immediate. Marieke just returned from a trip across China and Japan — and came home with a head full of observations. One in particular stuck: in Hong Kong, mainland Chinese shoppers were flooding the malls. Not because of some new retail trend, but because the maths suddenly made sense. A weak dollar means a weak HKD — which is pegged to it — which means everything priced in Hong Kong dollars is cheap for anyone earning or saving in yuan. A Chinese city, running on American monetary policy, accidentally on sale to its own citizens.
That small observation is the thread we pulled. And it leads somewhere interesting.
A City In Between
Hong Kong has always been a city in between. Between East and West, between colony and sovereign territory, between market freedom and party control. Its monetary system is, in many ways, the purest expression of that in-betweenness: a Chinese city whose entire financial existence is anchored to the United States dollar.
That arrangement has made Hong Kong extraordinarily prosperous. It has also made it a strategic puzzle for Beijing. As China embarks on one of the most deliberate dedollarization campaigns in modern financial history — expanding yuan swap lines, promoting its Cross-Border Interbank Payment System (CIPS), rolling out the digital yuan, accepting yuan payments for oil — Hong Kong sits at the centre of a paradox. It is China’s most important gateway to global capital markets, and it runs on the currency of China’s primary geopolitical rival: US dollars.
How can China use its most valuable financial bridge, Hong Kong, to escape the very currency that keeps that bridge standing? Answering that question sits at the intersection of monetary history, geopolitical competition, and the coming war over who controls the digital infrastructure of global finance.
Is Hong Kong China’s ultimate joker’s card when it comes to full sovereignty and de-dollarization or its weakest link?
From Crown Colony to Currency Board
To understand Hong Kong‘s monetary situation today requires understanding how it came to be tied to British sterling, then to the US dollar, and the political tremors that drove each transition.
Hong Kong was ceded to Britain in 1842 following the First Opium War, and for most of its colonial history its currency drifted between various anchors. After moving off sterling when the pound began its long post-war decline, the territory briefly floated its dollar in 1974. The experiment went badly. Inflation surged, speculative pressure mounted, and the economy lurched.
The decisive moment came in 1983. The Sino-British negotiations over Hong Kong’s post-1997 fate — the year Britain’s lease on the New Territories was due to expire and sovereignty over the whole territory would revert to China — had begun in earnest, and confidence collapsed spectacularly. On September 24 of that year, later dubbed “Black Saturday,” the Hong Kong dollar was devalued by 15% over two days to a historical low of HK$9.60 to the US dollar. Shops began quoting prices in US dollars and refused to accept local banknotes. There were runs on food staples. It was a currency crisis born entirely of political fear: investors had no idea what Hong Kong would look like under Chinese rule, and they voted with their capital.
The response was the Linked Exchange Rate System (LERS), announced on October 17, 1983, fixing the Hong Kong dollar at HK$7.80 to the US dollar through a currency board mechanism. The architect was economist John Greenwood, who proposed a simple, rule-based system in which every Hong Kong dollar in circulation would be fully backed by US dollar reserves held at the Exchange Fund. There would be no discretion, no central bank rate-setting, no monetary policy independent of the Federal Reserve. Credibility through constraint.
The peg survived the handover to China in 1997, the Asian financial crisis the same year, the SARS outbreak of 2003, the global financial crisis of 2008, the social unrest of 2019, and the COVID-19 pandemic. Since 2005, the HKMA has maintained the rate within a band of HK$7.75–7.85 per US dollar. The system has been a remarkable feat of institutional endurance — and one of the most transparent monetary frameworks in the world. Today, Hong Kong’s entire monetary base remains fully backed by US dollar assets held in the Exchange Fund.
