The chair of an influential parliamentary committee is asking the Federal Reserve to consider cutting off a potential financial lifeline to Hong Kong during coronavirus-era market turmoil.
In a letter sent to the U.S. central bank last week and obtained exclusively by CNBC, Rep. John Moolener (R-Mich.) said the Fed should review the Hong Kong Monetary Authority’s access to the Foreign and International Monetary Authority Repo Facility. Mr. Moolener serves as chairman of the Chinese Communist Party Special Committee.
The FIMA system allows central banks to effectively borrow dollars from the Fed using the assets held by each country’s treasury as collateral. It was devised as a way to ensure the government had access to dollars in times of crisis without having to sell U.S. Treasuries, which could cause a downward spiral in prices.
The move to potentially limit Hong Kong’s access to dollar liquidity sources comes as China seeks to promote its currency, the renminbi, to replace the dollar as the foundation of the global financial system. Despite a positive tone during President Donald Trump’s recent meeting with Chinese President Xi Jinping in Washington, U.S.-China relations remain rocky.
The Fed has received Mr. Moolener’s letter and plans to respond, a spokeswoman said.
‘Very delicate ceasefire’ between US and China
Still, Shehzad Kazi, managing director at research firm China Beige Book, said it was unlikely that Federal Reserve Chairman Kevin Warsh would take any action that would be seen as interfering with China policy at a sensitive time.
“However, this is an example of a new way Congress is beginning to assert its role in China policy,” Kazi said. The “very tenuous ceasefire” between the two countries remains very fragile, he said.
FIMA has not been used extensively since its creation in 2020, but in August Treasury Secretary Scott Bessent urged Japan to use FIMA to support the yen.
The dollar maintains its position as the world’s major reserve currency. It accounts for 56.7% of the world’s central banks’ official foreign exchange reserves, according to the International Monetary Fund, and is widely used to settle global trade. Investors treat short-term U.S. Treasuries like cash.
These attributes provide significant advantages to Americans by reducing the cost of financing the large U.S. debt and by allowing us to do business abroad in our own currency.
China has ambitions to overtake the US dollar, although it starts from a huge disadvantage. According to the IMF, the renminbi accounts for 2.1% of foreign exchange reserve holdings.
Still, the Chinese government is taking steps to change this situation, seeking to make Hong Kong a testing ground for building an alternative global financial structure.
Hong Kong has long been a British territory, developing its own financial and legal system in parallel with China’s. However, China now has strong control over Hong Kong, a factor Moulenaar cited in his letter.
He said the Fed needs to consider “the complete dismantling of the legal and institutional autonomy that has historically distinguished Hong Kong from mainland China and justified preferential treatment under U.S. law.”
Moolenaar said the Fed should consider this change in conjunction with China’s recent efforts to boost its currency as an alternative to the dollar.
dollar excellence
In June, the People’s Bank of China launched its own version of the Fed’s FIMA facility to allow the central bank to make short-term loans on Chinese government bonds. People’s Bank of China Governor Ban Gongsheng said in July that Hong Kong would be the first user.
“The Fed’s own facilities should not be passive participants in that process, nor should the Chinese Communist Party be allowed to copy and paste the U.S. system,” Moolener said.
But Cornell University economics professor Eswar Prasad said taking away Hong Kong’s access to dollar liquidity sources could create its own risks. “If anything, FIMA’s repurchase facility increases the dollar’s presence in global finance and also strengthens the role of U.S. Treasuries as a global safe-haven asset,” Prasad said.
“Therefore, it is unlikely that restricting access to this facility would in any way strengthen the dollar’s dominance or eliminate the threat to the dollar,” he said.
The Fed’s protective umbrella is boosting the dollar’s appeal among global investors who aren’t entirely confident that money invested in authoritarian China can be safely exported.
The FIMA facility was created to ensure authorities have access to dollars in times of crisis, on a network of swap lines that allow countries to exchange their currencies for dollars. The Hong Kong Monetary Authority was one of the earliest central banks to be granted access in 2020, with Fed officials saying at the time that Hong Kong “could become a template for other central banks.”
The Fed reports the overall level of utilization of its FIMA facility, but does not break down how much each central bank borrowed. No one was using the facility as of Wednesday, according to the latest data from the Fed.
Moolenaar said in the letter that Hong Kong withdrew up to $1.4 billion from the facility in May 2020 but has not used it effectively since then.
“Given the current modest fiscal risks, now is the right time for a careful review rather than a reactive response during a crisis,” he said.
The Hong Kong Monetary Authority did not respond to a request for comment.
