Hong Kong's financial mandarins know that their real problem in preserving the Hong Kong dollar isn't speculators such as George Soros. It's China. With $60 billion in foreign reserves, no net government debt, and a stellar record of economic performance, the Hong Kong Monetary Authority has enough firepower to fight off most currency speculators. But if the Hong Kong people decide in the months before or after July, 1997, when Beijing takes over, that they don't want to hold Hong Kong dollars, there are few ways to force them. With no capital or currency controls, it only takes a telephone call to shift Hong Kong money into safe currencies. A capital flight of this kind would be nearly impossible to stop.
So China must do anything it can to avoid panicking Hong Kong after it resumes sovereignty over the territory. Hong Kong Monetary Authority chief Joseph Yam has good relations with his mainland counterparts. But he's blunt in saying they don't belong on the board of the Monetary Authority if Hong Kong is to keep monetary independence. The Basic Law, which governs China's actions toward Hong Kong until 2047, gives the colony the right to an independent monetary policy. Will Beijing allow financial independence when it won't permit it in the political sphere? That's what currency traders are asking as they decide whether or not to short the Hong Kong dollar in the months ahead.
If Chinese leaders don't permit this kind of financial freedom and assuage the anxieties of Hong Kong's people, then all the currency reserves in the world won't stem the torrent of money leaving. China's leaders will be left with an empty shell instead of one of the world's most dynamic cities.