For the first time in 30 years, the Hong Kong dollar's peg to the greenback is facing a legitimate threat, and not - as Kyle Bass once articulated, and as we explained earlier this week - simply because a mass exodus from the city would likely drain the HKMA's FX reserves, making the maintenance of the peg impossible. For years, the flood of foreign capital into Hong Kong guaranteed the peg's security.
When Bloomberg reported last night that the Trump Administration was mulling a plan to deliberately break the peg and ratchet up pressure on Hong Kong as retribution for Beijing's adoption of a new National Security law that severely encroaches on the freedoms guaranteed to Hong Kongers in the British 'Basic Law', the reporter carefully noted that some in the administration are pushing back against the plan, for fear it would only hurt US banks and Hong Kongers, while doing little to dissuade Beijing.
Unsurprisingly, the news has undermined shares of global banks that derive sizable portions of their revenue from Hong Kong, leaving financials as the worst-performing stocks across Asian and European trading on Wednesday. HSBC led declines on the Stoxx Europe 600, as the bad news also drove Investec to cut its rating on HSBC.
The bank with the most to lose here is, of course, HSBC, which shed another 4.3% in London trading, its biggest daily drop since June 11, when officials in Beijing singled out the bank for not enthusiastically backing the HK security law. Having since offered the lip service that was due, the bank's shares have still considered to suffer, as the White House has imposed sanctions on Chinese officials over abuses tied to Xinjinag, while moving to eventually revoke Hong Kong's "special status" under US law.
HSBC's biggest UK-based regional rival operating in HK, StanChart, falls as much as 2.3%.
According to BBG, the US government is looking for a way to punish Hong Kong-based banks, and HSBC, which is suddenly caught in the middle of a geopolitical dispute, might find itself in Washington's crosshairs. Investec analyst Ian Gordon wrote that he was "running out of arguments" to hold HSBC. Even plans to fire 35,000 workers as part of a sweeping restructuring sadly just isn't enough.