Hong Kong’s dollar peg is in a bind. The wide yield spread between U.S. government debt and the Asian hub’s equivalent has forced the special administrative region of China’s monetary authority to repeatedly intervene to keep the currency from crossing the weak end of its official trading band of 7.75 to 7.85 per dollar. It’s doable in the short term, but investors are worried about the city’s economic future.

Since September, the Hong Kong Monetary Authority’s aggregate balance, a crucial indicator of bank cash, has fallen from HK$458 billion ($58 billion) to below HK$50 billion as it maintains the defense. The slope is severe, and the last comparable decline took nearly four years. The de-facto central bank has bought Hong Kong dollars 40 times in the past year.

Bill Ackman, CEO of Pershing Square, claims Hong Kong’s financial system can’t support the peg and questions its rationale. Since 1983, the system has linked local interest rates to American monetary circumstances, forcing Hong Kong to rise even as its China-facing economy shrank for four quarters in 2022.

The extent of relief is unknown. The currency rate has not strengthened as predicted after China lifted its harsh economic controls. Moreover, definitive data reveals the Hang Seng Index (.HSI) is one of the worst-performing major stock exchanges, up just over 1% this year.

In April, Stock Connect equities trading scheme northbound flows decreased, and Chinese private equity interest plummeted. Both are negative for the Asian financial entrepôt, which gains from funneling money into the People’s Republic. Financial instruments help officials maintain system liquidity. So the city’s currency will benefit if the Fed stops raising rates and corporate activity picks up.

Long-term Hong Kong dollar demand depends on economic strategy confidence. Aging and emigration are reducing its population, and it is questionable if it can recruit enough immigrants to compensate. In addition, Chief Executive John Lee has lifted onerous Covid-19 restrictions that stifled growth, but geopolitical tensions between Washington and Beijing are slowing capital flows and stagnating trade, retail, and technology. As a result, Hong Kong’s peg is stable, but its future is uncertain.