HKSAR should prepare for potential ‘financial Cold Wars’

It has been 25 years into Hong Kong’s reunification with its motherland, yet some people keep wondering whether “one country, two systems” will remain unchanged in future.

I reckon that the basic principle of “one country, two systems” won’t change, as the framework has served Hong Kong well, but its implementation mechanism will advance with the times for sure. What Hong Kong people should be concerned about are external challenges.

The greatest challenge for Hong Kong in the foreseeable future is the geopolitical maneuvers of the United States, which in all likelihood will continue to play the “Hong Kong cards” among other “cards” in its attempts to contain China.

The forthcoming administration of John Lee Ka-chiu will have its work cut out for it, fending off foreign interference and advancing socioeconomic development in the next five years. One of the tough tasks is to safeguard the city’s foreign currency reserve assets of US$465.7 billion and to promote socioeconomic development by leveraging these assets.

Some commentators have warned about possible “financial Cold Wars” such as those actions taken against Russian overseas assets, or even an attempt to shut Hong Kong out of the SWIFT system or undermine Hong Kong’s linked exchange-rate system

One possible way would be to invest in the high-quality assets on the mainland, which are not only a safe hedge but also have great potential for capital appreciation to the benefit of Hong Kong’s future development. One of the options is to build a deep-water port on the Wanshan Archipelago in the Pearl River Estuary, similar to the Yangshan Port in Shanghai, to replace the outdated container terminals in Hong Kong. A commercial town can also be constructed adjacent to the proposed port. These projects would greatly expand Hong Kong’s economic landscape and give a huge boost to its economic competitiveness if put into reality.

The Hong Kong Monetary Authority earlier announced that the city had total foreign currency reserve assets of US$465.7 billion at the end of April, which is more than six times the currency in circulation, or about 44 percent of the M3 money supply in Hong Kong. The city’s financial foundation is sound but is not totally immune to potential US attempts to undermine it.

Some commentators have warned about possible “financial Cold Wars” such as those actions taken against Russian overseas assets, or even an attempt to shut Hong Kong out of the SWIFT system or undermine Hong Kong’s linked exchange-rate system.

Some experts reckon that Washington will not go to extremes and weaponize the SWIFT and other international financial instruments, as it would not only harm the US’ interests in Hong Kong and fail to achieve the desired effect but also undercut the status of the US dollar as a reserve currency, or even hasten the end of the US-dollar supremacy.

But what if rationality eludes Washington? Hong Kong should come up with sufficient backup measures to safeguard its financial stability. It is suggested that the Hong Kong dollar should be depegged from the US dollar and be pegged to the renminbi or a currency basket instead. Eddie Yue Wai-man, chief executive of the Hong Kong Monetary Authority, previously weighed in on this issue, contending that the HKMA fully understood the potential risks and had formulated contingency plans for any undesirable scenarios, but he declined to reveal details.

As far as I understand, Hong Kong should wait and see before taking any action in relation to the linked exchange-rate system. But a more proactive approach, on the other hand, should be adopted to protect the city’s US$465.7 billion worth of foreign currency assets.

Finding a safe haven for their dollar assets is a matter of concern for many countries now. Are those assets still safe in the US, Britain or Switzerland? Even EU countries are scrambling to bring their dollar assets back home before finding a safe anchorage. Hong Kong would not be so ill-advised as to place its dollar assets in those unsafe places. The most secure place, in my opinion, is still the Chinese mainland. Instead of letting the assets sit idle, investing in the mainland’s high-quality assets will allow for de-dollarization and demonetization. It is probably the only way out for Hong Kong amid the paradigm shift in the global power balance and the intense Sino-US rivalry.

The city’s container terminals are rather antiquated and off the pace compared to the smart management systems on the mainland. Besides, Hong Kong’s water is not deep enough for the huge container ships. If Hong Kong learns from Shanghai’s experience in building the Yangshan Port and manages to build a world-class deep-water container terminal port in the Wanshan Archipelago in the Pearl River Estuary, the existing container terminals in Hong Kong can then be converted into housing estates that can accommodate 600,000 residents.

Such a bold initiative, a project of multiple benefits for sure, will require much courage and a can-do spirit on the part of the new administration.

The author is president of the Golden Mean Institute, a Hong Kong think tank.

The views do not necessarily reflect those of China Daily.