The "Trump 2.0" era has begun, with Trump recently announcing tariffs on goods from China, Canada, and Mexico. This move has heightened global attention on the U.S.-China power struggle and its repercussions for financial markets.

Eddie Yue, Chief Executive of the Hong Kong Monetary Authority (HKMA), commented that the trade war will negatively impact the global economy, inflation, and supply chains, asserting that no economy will benefit. He acknowledged that while Hong Kong will feel the effects, it is too early to assess the extent of that impact, as it depends on which measures will be implemented. He believes that the diversification of export destinations for both the mainland and Hong Kong will help mitigate some of these trade friction effects.

During a Legislative Council meeting, Yue emphasized that the HKMA's primary role is maintaining financial stability. Given the rapid changes in the external environment, he stressed the need for resilience within Hong Kong's financial system, backed by foreign exchange reserves of over HK$4 trillion to support the linked exchange rate. He urged vigilance in market monitoring and the importance of having solid contingency plans for various changes. While he acknowledged that the trade war would affect Hong Kong's exports, he noted that diversifying export markets could lessen some impacts. He expressed confidence that measures from the mainland aimed at expanding domestic demand would further support Hong Kong's economy.

Yue also addressed concerns regarding the foreign exchange fund's use in covering the fiscal deficit. He explained that the Financial Secretary can allocate funds to the fiscal reserve with the approval of the Chief Executive and the Executive Council, provided it does not jeopardize Hong Kong's monetary stability. He highlighted the unpredictability of external shocks, making it difficult to determine the necessary level of foreign exchange reserves to safeguard currency stability.

Regarding investments, Yue clarified that the foreign exchange fund does not purchase local assets, as it focuses on long-term investments in offshore assets. However, he welcomed the People's Bank of China's investment in Hong Kong's capital market and reiterated Hong Kong's commitment to diversified investments, including those in the mainland market.

Lastly, despite recent doubts about the suitability of the linked exchange rate, consensus among experts suggests it remains the best choice for Hong Kong. The HKMA affirmed its commitment to maintaining this system, which is crucial for the stability of Hong Kong's economy, given its reliance on trade and finance.

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