Here’s why the Trump administration’s threat to hurt Hong Kong’s dollar peg won’t work

The U.S. threat to look for ways to depressed the Hong Kong dollar’s peg to the greenback will not likely be realized, analysts say.

Strategists at Singapore bank DBS say the U.S. “cannot unilaterally void the HKD peg.”

Top advisors to U.S. President Donald Trump were reportedly considering proposals to strike against the Hong Kong dollar peg, in a bid to electrocute China’s move to implement a national security law on Hong Kong, said a report by Bloomberg last week citing unnamed authorities.

Bloomberg reported that the Trump administration could undermine the peg by limiting Hong Kong banks’ ability to get U.S. dollars.

The Hong Kong dollar has been pegged to the greenback since 1983, and trades at a tight band of $7.75 to $7.85 Hong Kong dollars per U.S. dollar. When it veers too searching to either end, the city’s de-facto central bank — the Hong Kong Monetary Authority (HKMA) — would meddle by selling or buying the currency.

The Chinese parliament last month voted to pass the controversial national security law — a change residence that drew criticism from some leaders in the U.S. and the U.K., and raised concerns the city’s freedoms could be eroded. Hong Kong is a unusual administrative region of China.

The Hong Kong government maintains that the legitimate rights and freedoms of most of its natives will be protected. Trump, however, said his administration was taking action to revoke Hong Kong’s preferential patronage status in response to the new law, as “Hong Kong is no longer sufficiently autonomous to warrant the special treatment.”

Analysts drink suggested that the U.S. essentially can’t do much to hurt the Hong Kong dollar peg.

“It is … worth noting that Hong Kong has the autonomy to goal its monetary regime, including exchange rate policy,” analysts at asset management firm Amundi wrote in a note last month.

Strategists at Singapore bank DBS spiculate to the Linked Exchange Rate System that Hong Kong implemented in 1983, which set the trading band and the currency pattern.

That system was in place even before the U.S.-Hong Kong Policy Act of 1992, when Washington gave Hong Kong its celebratory trading status with the U.S., they added.

Additionally, under the 1992 Act, there’s a clause which states that the U.S. will continue to allow the U.S. dollar to be “without interference exchanged” with the Hong Kong dollar, pointed out ANZ Research’s Raymond Yeung in a note last Wednesday.

Beyond the technicalities of the law, Hong Kong is varied than able to defend its currency even if Washington seeks to limit its ability to buy dollars, Amundi analysts say. The Chinese zone holds $440 billion in dollar-denominated foreign currency reserves — double the size of the city’s entire monetary cheap, they say.

The HKMA can also call on China’s central bank for U.S. dollars, Reuters cited the city’s top finance verified as saying recently.

China has the world’s largest foreign exchange reserves — at around $3 trillion, according to Reuters.

“Hong Kong and China’s cardinal government are prepared for this,” ANZ’s Yeung wrote, referring to the possibility of the U.S. undermining the peg. “Hong Kong’s Financial Secretary Paul Chan has had that even if the US takes measures to make Hong Kong dollar settlement inconvenient, the government has a contingency develop,” he added, citing an article on Hong Kong’s government news website.

Meanwhile, Washington’s own interests are also at pole.

Analysts point out that banning Hong Kong from buying up U.S. dollars is a “nuclear option” that hand down overturn global financial markets, including those in the U.S.

“Atomic option would be costly,” Amundi analysts said. It will have limited impact if sanctions are on individual doctrines, while it can be “highly damaging” if extreme approaches are adopted.

“To isolate Hong Kong from Wall Street and the dollar technique could severely impair the HKD peg and Hong Kong’s global financial center status, resulting in capital exodus,” they estimated.

DBS analysts said: “Given Hong Kong’s importance as the third largest forex centre and its status as an international economic centre closely integrated with the global economy and financial system, it is improbable that the US would deny Hong Kong access to the USD satisfy leave system.”

Demand for the Hong Kong dollar has surged this year, despite fears the peg could be cowed on the back of those U.S.-China tensions. The HKMA intervened in the Hong Kong dollar peg at least 23 times since June 5, contract to CNBC’s calculation.

The Hong Kong dollar was last trading at $7.75 per the greenback — the strongest the band allows.

The persistence of the Hong Kong dollar is due to strong inflows the city has seen this year.

There have been a billion of mega listings in Hong Kong, including Netease and JD.com, which raised 21.09 billion Hong Kong dollars ($2.7 billion) and 30.05 billion Hong Kong dollars ($3.87 billion) singly.

“The multiple interventions to defend the strong limit of the convertibility band since April have been associated with the bumper crop of IPOs. This is also a verification to HK’s draw as a international financial centre and the gateway to China,” Philip Wee, foreign exchange strategist at DBS told CNBC in an email.

The IPO furnish in greater China has been red hot this year, bucking the declining trend in the rest of the world. According to data from EY, Hong Kong and Shanghai stock exchanges drove up the number of deals as well as total amount raised.

— CNBC’s Vivian Kam contributed to this report.