Fed is urged to rethink Hong Kong’s access to dollar lifeline

The chairman of an influential congressional committee is urging the Federal Reserve to consider cutting off a potential financial lifeline extended to Hong Kong during Covid-era market turbulence.

The Fed should review the Hong Kong Monetary Authority’s access to the Foreign and International Monetary Authorities Repo Facility, Rep. John Moolenaar, R-Mich., said in a letter sent to the U.S. central bank last week and exclusively obtained by CNBC. Moolenaar chairs the Select Committee on the Chinese Communist Party. 

The FIMA facility allows central banks to effectively borrow dollars from the Fed with those countries’ Treasury holdings as collateral. It was conceived as a means to ensure governments could get access to dollars in a crisis without having to sell Treasurys, which could create a downward spiral for prices. 

The push to potentially limit Hong Kong’s access to a source of dollar liquidity comes as China is making efforts to promote its currency, the renminbi, as an alternative to the dollar as the bedrock of the global financial system. The U.S.-China relationship remains fraught despite the cheerful tone of President Donald Trump’s recent meeting in Washington with Chinese leader Xi Jinping. 

The Fed is in receipt of Moolenaar’s letter and plans to respond, a spokesperson said. 

A ‘very tenuous truce’ between the U.S. and China

Still, Fed Chairman Kevin Warsh is unlikely to take a step that could be seen as interfering with China policy at a sensitive moment, said Shehzad Qazi, managing director of China Beige Book, a research firm. 

“That said, this is an example of the novel ways Congress could begin asserting its role in China policy,” Qazi said. The “very tenuous truce” between the two countries remains highly vulnerable, he said.

FIMA has been used only sparingly since its creation in 2020, though in August Treasury Secretary Scott Bessent urged Japan to use it to support the yen.   

The dollar remains secure in its status as the premier global reserve currency. It makes up 56.7% of global central banks’ official foreign reserves, according to the International Monetary Fund, and is widely used to settle global trade. Investors treat short-term U.S. Treasurys as equivalent to cash.

Those attributes give Americans major advantages by lowering the cost of financing the outsized U.S. debt and allowing them to conduct business abroad in their own currency.

China has ambitions to edge out the U.S. dollar, though it is starting from a major disadvantage. The renminbi makes up 2.1% of reserve holdings, according to the IMF.

Still, Beijing is taking steps to change that, and is making Hong Kong its laboratory for the creation of an alternative global financial architecture. 

As a longtime British territory, Hong Kong developed its own financial and legal systems in parallel to China. But China now has firm control over Hong Kong, a factor Moolenaar cited in his letter.

The Fed needs to take into account “the complete dismantling of the…