The impact of the US-China currency war on Hong Kong’s economy

The US-China trade negotiations failed, the US president announced that an extra 10% tariff will be imposed on the US$300 billion of Chinese-to-the-US exports with effect from September 1. The Chinese side retaliated to stop buying US agricultural products and immediately depreciated the yuan, which can offset the cost increase of Chinese goods due to the tariff. Yet the US announced today to list China as a currency manipulator, the two countries de-facto declared a currency war on top of the trade war. Hong Kong inevitably would become a victim!

Originally, the US-China trade has a long-term deficit. According to the logic of international trade economics, if the currencies of the trading countries are perfectly free to be exchanged in a market, the surplus country should have a currency appreciation pressure, and thus the people are increasingly able to purchase foreign goods, which naturally balances the trade deficit. However, this situation has not appeared in Sino-US trade. On the contrary, in the past 30 years, the trade deficit has been expanding. For details, please refer to my article and short film at [1].

China’s current action is contrary to economic theory. Even in the existence of a large and expanding surplus, not only did it increase the exchange rate and increase the purchase of US goods, but instead as a gesture of retaliating against US tariffs, China ordered the suspension of buying US agricultural products and pushed down the exchange rate of the RMB currency. These actions would make it even harder to strike a balance between the 2 country’s trade deficit problem. As Hong Kong is one of the most important entrepots between China and the United States, the import and export business is bound to be further adversely affected even harder. The last round of trade tariffs has caused Hong Kong to experience negative growth of imports and exports for eight consecutive months. The latest Hong Kong export value in June 2019 has fallen -9%, for details please refer to my article at [2]. It is estimated that the new round of tariffs will increase the decline of Hong Kong’s import and export by about 3% more.

By means of currency depreciation, the price of China’s export goods could be reduced immediately, which would theoretically induce more foreign buyers to buy more Chinese goods. It should be able to offset the effect of increasing the tariffs. However, since the US listed China as a currency manipulator, the President has the right to order US companies not to buy goods from any currency manipulation countries. Thus, the currency depreciation tactic cannot offset the tariff. It works like an embargo!

Since Hong Kong currency is linked to the US dollar. The depreciation of the Renminbi has made Hong Kong’s import and export services more expensive. It directly hits Hong Kong’s re-export business. Even if it is not for US imports and exports, Hong Kong’s services for Mainland China will become expensive. I believe that as the currency war escalates, more and more traders will give up Hong Kong and switch to other cheaper ports.

The currency devaluation does not only impose an impact on traders, but it would also impact on Chinese enterprises borrowing foreign currencies, including major Chinese banks. In the past, due to a large amount of borrowing of US dollar debts, for the sake of the lower interest rate and no quota, but now the enterprises have to earn more renminbi to pay the debts and interest. In case of a recession resulting in less income to repay the debts, then there will be bankruptcies of enterprises and banks. This is probably the situation of Thailand during the Asian Financial Turmoil in July 1997. Hong Kong is one of the financial centres where Chinese companies and banks borrow money. If borrowers are unable to repay their lenders and result in bad debts, Hong Kong lenders will need to make provisions which would adversely affect their performance.

Furthermore, the depreciation of the Chinese currency has a big impact on other exporting countries. When the price of Chinese goods is reduced through monetary policy, other exporting countries have to follow the currency depreciation in order to compete, thus triggering a global currency war. The bankruptcy risk of foreign currency borrowing institutions is spilled over from one country to other countries. It is contended that the cause of the Asian Financial Turmoil was caused by the sharp depreciation of the renminbi in 1994.

Referring to Figure 1, it shows that the renminbi substantially and vertically depreciated in 1994, from about 1-to-6 down to 1-to-8 until 2005, it looks like a rare 90-degree change in this ten-year period.

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Figure 1 Dollar to RMB exchange rate chart. Source:

Other exporting countries such as Thailand and Malaysia have followed the depreciation of the currency, and finally triggered the Asian Financial Turmoil in 1997. This is a famous theory by Professor Steven Cheung.

Besides, there is another period of a fixed US-RMB exchange rate period. Figure 1 shows that during the Global Financial Crisis between 2008 and 2010, the USD-RMB exchange rate has once again become a horizontal line, which is locked below 1-to-7. Since then, the US dollar has not broken the 1-to-7 threshold.

The break of the 1-to-7 mark yesterday is a breakthrough of the past 10-year history. If the decline continues, it may affect the fund flow. Foreigners and Chinese citizens may convert their RMB into foreign currencies. However, due to foreign currency control system in China, the daily exchange amount is limited. In case there is a rush of exchange, China may further tighten the exchange restrictions. Therefore, residents of China and Hong Kong holding large amounts of RMB may want to exchange them for other anti-depreciation assets, such as gold, buildings, stocks, etc.

Unfortunately, the global economic recession seems to drag the global property markets and the global stock markets. Many markets have shown a downward trend, the risk of buying a property or buying shares has risen sharply.

(A Chinese version is available at


[1] 姚松炎 (2018) 美中貿易戰與人民幣匯率,獨媒,9月29日。

[2] 姚松炎 (2019) 美中貿易戰對新加坡和香港經濟的影響,方格子,7月26日。

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