Photo: VCG

US President Donald Trump on Tuesday signed the Hong Kong Autonomy Act and an order to end the preferential trade status for Hong Kong, following the enforcement of a new security law in the southern Chinese city.

Politically speaking, the new bill - which will give the US "new tools" to impose sanctions on Chinese individuals and entities involved in the national security legislature - is a gross interference in China's internal affairs. On the economic front, by playing nearly all possible cards, the US has made no secret of its malicious attempt to attack the Hong Kong economy. That, however, won't shake the city's status as a financial hub as the fog of political uncertainty is lifting.

Despite recent media reports that top advisors to Trump were considering proposals to hurt the Hong Kong dollar's US dollar peg, anyone with a basic knowledge of Hong Kong's linked exchange rate system would know how unrealistic that is. 

The cornerstone of Hong Kong's economic stability is finance, which is based on its linked exchange rate system. A rough analysis of global monetary systems would show that it is up to a local government to decide whether and how to peg its currency to major international currencies. Hong Kong set its currency trading system in 1983, and it was not until 1992 that the US implemented the US-Hong Kong Policy Act to give the city special trade status. Thus, Hong Kong's exchange rate arrangement is not subject to US approval.

Of course, in some extreme scenarios, restricting Hong Kong from purchasing the greenback could also be an option, but that would be a "financial nuclear bomb" that would hurt the US' financial hegemony more than the Hong Kong economy, according to financial insiders. While the impact of financial sanctions against individual entities could be limited, the same could generate devastating effects on the global financial market if their target is a financial hub, as important as Hong Kong. The US clearly cannot afford to punish China at the cost of impairing global confidence in dollar-denominated financial assets.

Over the past two decades, while the Chinese government has largely allowed Hong Kong political autonomy, the economic ties between the mainland and Hong Kong have been strengthened. During the process, establishing a Hong Kong branch has become the first choice for many foreign and domestic companies eyeing the mainland and Southeast Asia. It is not a stretch to say that Hong Kong's status as an international financial and trade hub has been further consolidated by its connection to the mainland.

The implementation of the new national security law will have no impact on the economic freedom of Hong Kong as it only targets violations that touch the bottom line of national security. 

Judging from the recent performance of the Hong Kong financial market, the situation is expected to stabilize soon as the city is bound to benefit from more favorable policies from the central government. In fact, many connectivity policies have already been implemented in the Guangdong-Hong Kong-Macao Greater Bay Area, which is expected to significantly expand the market space for the cluster of cities in South China.