City’s leader Carrie Lam invoked a tough, colonial-era emergency law to ban masks during public assemblies in bid to stop escalating violence

Free convertibility of the Hong Kong dollar continues to be in place, financial secretary writes in his blog

Hong Kong’s finance chief Paul Chan Mo-po says the government is committed to keeping the city free from any foreign exchange controls, quashing rumours that a controversial anti-mask law will be followed by restrictions on capital flows in and out of the city.

Hong Kong’s leader, Chief Executive Carrie Lam Cheng Yuet-ngor, implemented a ban on people wearing masks at public assemblies by invoking a tough, colonial-era emergency law not used in more than half a century on Friday.

The months-long anti-government protests descended further into widespread violence and half-paralysed the ci
ty at the weekend in response to the ban and resulted in rumours circulating online that curbs could be extended to Hong Kong’s financial system.

“Let me reiterate again that the Hong Kong government has no plan to impose foreign exchange controls. The free convertibility of the Hong Kong dollar continues to be in place. The inflow and outflow of capital continues to be in place. This is a solemn guarantee enshrined by our Basic Law,” Chan wrote in his Chinese-language blog on Sunday, referring to the city’s mini-constitution.

The Basic Law stipulates that the government will ensure the free convertibility of the Hong Kong dollar, and will not impose foreign exchange controls.

Meanwhile, Chief Secretary Matthew Cheung Kin-chung, the city’s No 2 official, wrote in his blog that the law was a necessary and difficult decision taken to curb the violence.

Chan said the city’s foreign currency reserves, at US$430 billion, were equivalent to two times Hong Kong’s monetary base.

The linked exchange rate system, under which the Hong Kong dollar is pegged to the US dollar in the range of 7.75 to 7.85, had functioned effectively for the past 36 years, enabling businesses and investors to operate and transfer capital under a stable financial environment, the financial secretary wrote.

The peg had withstood previous economic cycles and operated effectively during cycles marked by massive capital outflow and inflow, Chan said.

Hong Kong’s fiscal reserves, at HK$1.14 trillion (US$146.15 billion) as at the end of July, was equivalent to 38.3 per cent of the city’s gross domestic product and could sustain the government’s operating expenses for 23 months.

“These factors point to the strong support backing the Hong Kong dollar,” he wrote.

Chan said the banking system remained sound, with banks’ overall liquidity ratio at 150 per cent and average capital adequacy ratio at 20 per cent.

Chan’s commentary came after investment bank Goldman Sachs estimated in a research note last week that, as at the end of August, between US$3 billion and US$4 billion in Hong Kong dollar deposits had flowed to Singapore, the city’s rival international financial centre.

But that was “still small” compared with the Hong Kong dollar and US dollar deposits in the city, which amounted to about US$1.5 trillion at the end of August, the investment bank said. Goldman did not link the outflow to the ongoing social unrest in Hong Kong.