Seeds from the 2008 Financial Crisis have taken root and sprouted into the trade war between the United States and China. Illustration: iStock
The Hong Kong dollar is now pegged to the US dollar. Illustration: iStock

Hong Kong should prepare for possible sanctions, including the removal of the city’s banks from SWIFT or a freeze of its overseas assets by the United States, according to a top financial official and an adviser to China’s stock market watchdog.

Financial Secretary Paul Chan wrote in a recent blog article that Hong Kong had to have a “bottom line mentality” and prepare for the scenario that the US weaponizes its currency to disrupt the order of Hong Kong’s financial markets.

Anthony Neoh, the chief adviser to the China Securities Regulatory Commission and a former chairman of Hong Kong’s Securities and Futures Commission, said if Hong Kong was disconnected from SWIFT, it could peg its currency with the renminbi and be injected with liquidity from China’s central bank.

The two financial heavyweights echoed new Chief Executive John Lee and HK Monetary Authority (HKMA) chief executive Eddie Yue, who both said last month that it was possible that Hong Kong could have its overseas assets frozen by the West.

However, commentators said a link between the Hong Kong dollar and the renminbi would not help Hong Kong maintain its Asian financial hub status.

Since Russian troops launched an invasion of Ukraine on February 24, the US and European Union have imposed several rounds of sanctions on Russian officials, oligarchs and banks. A part of Russia’s foreign exchange reserves was also frozen by the West.

On March 12, SWIFT disconnected seven Russian banks and their designated Russia-based subsidiaries from its financial transfer network. In late March, Russian President Vladimir Putin said European countries had to choose between paying for Russia’s energy in rubles or face a gas supply cut.

EU leaders said they agreed in principle on Monday to cut 90% of oil imports from Russia by the year-end and on other sanctions including the removal of Russia’s largest lender Sberbank from SWIFT.

A file photo showing the SWIFT logo and US dollars. Reuters/Carlo Allegri/Illustration

On Tuesday Gazprom, a Russian state-owned energy firm, said it had cut the natural gas supply to the Netherlands as Dutch trader GasTerra refused to pay in rubles. It warned Denmark could be next.

Over the past three months, the Russian army failed to occupy Ukraine’s capital Kiev and its second-largest city Kharkiv, but controlled Mariupol and some of the Donbas regions.

Since March, Chinese media and academics have published many articles criticizing the US for weaponizing its currency and using SWIFT to disrupt the global financial order.

Shi Donghui, a finance professor at Fanhai International School of Finance at Fudan University, wrote in an article on March 22 that the US had turned the SWIFT system into a “financial nuclear bomb” by passing the Iran Threat Reduction and Syria Human Rights Act of 2012 a decade ago.

Shi said the US had weaponized its currency to boost trade and achieve geopolitical goals for decades.

He said many countries had been aware of this and started reducing their reliance on the US dollar, which would lose its hegemony one day.

On April 12, Joseph Yam, a former chief executive of the Hong Kong Monetary Authority, said it was complete madness for the US to freeze Russia’s dollar-denominated overseas assets and disconnect Russian banks from the SWIFT system.

Yam said the US’ moves to restrict Chinese firms from raising funds in its markets and Americans from investing in Chinese companies were equal to capital control.

He said these sanctions would create inconvenience to the sanctioned countries, but in the long run undermine the US dollar’s status as a global currency. He said the US, as the world’s biggest debtor nation, should stop using these “stupid” tools and behave itself.

A Taiwanese Special Forces soldier during a drill. Photo: Agencies

The Financial Times reported on April 30 that Chinese financial regulators and major banks held a meeting on April 22 to discuss the US sanctions China could possibly face. It pointed out that China’s potential invasion of Taiwan could trigger US sanctions against China.

“As the US has treated China as its major rival, Hong Kong and mainland China must jointly prepare for the worst-case scenarios such as the de-peg of the Hong Kong and US dollars or the disconnection of Hong Kong and mainland banks with SWIFT,” John Lee, who was appointed as the new Chief Executive of Hong Kong by Beijing on Monday, said in his election campaign in early May.

HKMA chief executive Eddie Yue also said in early May the de facto central bank in Hong Kong had plans to minimize risks in some extreme situations, such as the financial hub being removed from the SWIFT system.

“The recent Russian-Ukrainian conflict has made it clear how the US has weaponized the dollar and some international financial systems to openly distort and interfere with the operation of global financial markets,” Hong Kong’s top financial official Paul Chan wrote in his blog on Sunday.

“Security is not only a national concern, but also a risk that companies must carefully assess.”

Chan said Hong Kong had to plan its future from a perspective of safeguarding national security and be prepared for different risks by making emergency plans with a “bottom line mentality.”

He added that Hong Kong had recently simplified its listing rules to welcome the US-listed “China concept stocks” that were seeking a second listing due to political concerns.

Anthony Neoh told Ming Pao, a Hong Kong newspaper, in an interview on Monday that if Hong Kong was barred from using the US dollar, it could choose to link its currency to the renminbi.

Neoh said it would be an easy task for the People’s Bank of China (PBoC) to inject several trillion yuan of liquidity into Hong Kong overnight, simply by printing money. He believed the PBoC and HKMA had thought about the technical issues.

He admitted that Hong Kong did not have the advantage of Russia, which could force its trade partners to buy its natural resources in rubles, as the city focused on re-exports of goods and the provision of services.

He said for the moment the peg policy had remained the best option for Hong Kong, but some extreme scenarios could still happen as some US politicians failed to understand the consequences of a currency war.

Senator Tammy Duckworth and the US delegation at a meeting in Taiwan. Photo: WikiCommons

Many political commentators have said the so-called emergency plans would not help Hong Kong maintain its external trade and financial operations. They said if the Hong Kong dollar was linked to the renminbi, which is not fully convertible, Hong Kong would have to impose certain capital control measures and lose its global financial hub status.

Meanwhile, a US delegation led by Senator Tammy Duckworth arrived in Taipei on Monday on a previously unannounced visit, said Taiwan’s Foreign Ministry. The delegation met with Taiwan’s President Tsai Ing-wen on Tuesday to discuss “regional security, economic and trade cooperation and all issues related to US-Taiwan bilateral relations.”

“Taiwan is a province of China, what president does it have to speak of?” China’s foreign ministry spokesman Zhao Lijian told a Kyodo News reporter on Tuesday. “Relevant US congresswoman’s visit to Taiwan seriously violates the one-China principle and the stipulations of the three China-US joint communiques.”

Zhao urged the relevant US politicians to immediately stop official exchanges with Taiwan in any form and refrain from sending any wrong signals to the “Taiwan independence” separatist forces.

Read: HK making emergency plans for SWIFT sanctions

Follow Jeff Pao on Twitter at @jeffpao3