Even before protests over a controversial extradition bill sparked the tumultuous pro-democracy movement that swept across Hong Kong last year, the notion that the city's freedoms were under threat, and that China would soon move to curtail them, had been gestating since the 2014 Umbrella Movement. Last Spring, before the movement began in earnest, Kyle Bass published a paper entitled "the Quiet Panic" about how Hong Kong was a ticking time bomb. A few months later, it exploded.
Over the past 16 months, expats haven't been the only ones fleeing Hong Kong. Virtually everyone who can afford to move has at least considered the possibility of selling their once extremely valuable Hong Kong real estate and fleeing elsewhere, perhaps to New Zealand, or Australia, or Malaysia - or Taiwan, which is currently drawing up plans to welcome expats.
As we reported on Friday, as more prepare to move before China tightens its grip, Sing Tao, Hong Kong's second-largest Chinese-language newspaper observed that Hong Kong residents have been exchanging more of their HKD holdings into foreign currencies at banks and money exchange counters on Thursday.
It got so bad that according to a follow up report from the SCMP on Saturday, the rush for US dollars forced money exchangers in Hong Kong to turn away hundreds of customers after running out of the currency amid fears the United States could end the city’s preferential trading status.
According to money exchange store owners, demand for the US currency surged this week after China’s legislature endorsed a resolution for its top legislative body to craft a tailor-made national security law for Hong Kong which would criminalize acts and activities of secession, subversion, terrorism and foreign interference.
In kneejerk response, HK residents - fearing the Hong Kong dollar could be unpegged from its US counterpart - rushed to convert their local currency into something they view as more stable: the US dollar.
Long lines promptly formed at money changers in a number of Kowloon districts including Tsim Sha Tsui and Sham Shui Po on Friday, as residents waited for shop operators to replenish their US dollar supply. Eric Wong Wai-lam, who runs Rich Bird Currency Exchange in Sham Shui Po, was forced to turn away 600 customers who wanted to convert their local banknotes to the US currency.
"There will be no US dollars for exchange until next Tuesday or Wednesday,” he told customers, adding that his shop could only serve those who had previously placed an order. He explained that demand for the US currency had increased 10-fold this week, with more customers looking to switch large sums – hundreds of thousands or even millions of Hong Kong dollars – at a time.
"The US dollar is out of stock everywhere. We’ve offered every last bit of our supplies to our customers,” Wong said adding that residents also sought alternatives such as the pound, Euro and Australian dollar. “People will take anything you have,” he said.
As the SCMP further details, civil servant Mike Ma had hoped to change HK$35,000 (US$4,514) into US dollars, but had to make do with £1,000 (US$1,237) and NT$20,000 (US$666) instead. The 35-year-old British National (Overseas) passport holder said he had been keeping foreign banknotes since Hong Kong was gripped by anti-government protests last year, but had visited exchange stores more often this week because of uncertainties over the city’s economic future.
Kevin Chan, operator of an online shopping site, bought US$3,000 on Friday, saying he had been doing so from time to time since the social unrest broke out. “It’s like buying insurance,” the 31-year-old said.
Chan said panic buying of the US dollar reflected how Hong Kong had found itself in the middle of a political tug of war between the world’s two superpowers. "[China and the United States] are bluffing now. You don’t know what stakes they will raise next. Hong Kong is in a passive position. It’s just a pawn to both sides," Chan said.
“I’m not confident about the current situation, same as many others. In case the US dollar peg is reset, buying the US dollar beforehand gives me more confidence."
The Hong Kong currency has been linked to the US dollar since 1983 and any change in the peg does not require approval from the US government. The Hong Kong government determines which currency the local dollar is pegged to. The currency is kept pegged in the range of HK$7.75 to HK$7.85 to the US dollar.
Eddie Yue Wai-man, chief executive of the local central bank, the Hong Kong Monetary Authority, said earlier this week the peg would remain the bedrock of the city’s financial system, with foreign reserves of more than US$440 billion. And while the city had yet to show any noticeable sign of fund outflows from the Hong Kong dollar or banking system, the market is starting to crack. Though spot HKD has been trading toward the strong end of its band as the Fed slashes rates to zero amid growing speculation the US central bank may soon follow through with negative rates, Kyle Bass's bet against the currency peg, which critics once slammed as absurd and unlikely to pay off, is becoming increasingly popular as a trade as derivatives markets price in growing expectations for depreciation.
Even Hong Kong’s largest banks, HSBC, saw a small handful of its automated teller machines run out of US dollars, but was working to replenish them. The bank has 39 locations that offer foreign currency, but not all distribute US dollars. Customers can withdraw up to HK$80,000 per day per bank card.
“HSBC has sufficient supply of banknotes and is committed to supporting its customers and the smooth operation of the financial system in Hong Kong,” a HSBC spokeswoman said.