Hong Kong is waging an intensifying battle against currency traders. Since April, the territory spent at least $9 billion defending its peg to the U.S. dollar, and there is plenty more where that came from.
The city's monetary authority is reminding speculators it has $434 billion more in firepower. Trumpeting the world's largest per capita foreign exchange reserves is central banker-speak for "do not try us."
But this is not another case of speculative traders like the financier George Soros in the 1990s betting against a currency peg. The pressure this time comes from economic logic.
The peg is here to stay, a who's who of Hong Kong experts assure the investment world. The 35-year-old link, pundits claim, is the linchpin of an economy often regarded as the world's freest.
Yet as Hong Kong scuffles with short-sellers, is it fighting the wrong war?
If only Chief Executive Carrie Lam and Norman Chan, who heads Hong Kong's de facto central bank, spent as much time and resources addressing worsening inequality and social mobility.
The falling Hong Kong dollar is a distraction -- more symptom than cause of the challenges bearing down on the territory. The currency is not sliding because investors lack faith in an economy growing more than 4%. Rather, Hong Kong is captive to its role linking China and the U.S.
In theory, the Hong Kong dollar should be surging. As the Federal Reserve ratchets up interest rates, the Hong Kong Monetary Authority is obliged to tighten in step. Its markets also are heavy recipients of cash from mainland investors moving wealth offshore.
Even so, the currency is sliding because of a massive "carry trade." Investors are borrowing cheaply in Hong Kong to buy higher-yielding assets in the U.S., where 10-year Treasury yields are near 3%. That is turning the "freest" economy into the world's biggest funhouse mirror, reflecting back the confusing tensions which economies face as Chinese and U.S. monetary policies diverge. Washington is yanking away the punch bowl of cheap money; Beijing is still in refill mode.
Good news for President Donald Trump's America, as those inflows into the U.S. support a stock rally on which his presidential legitimacy partly relies. It also helps America fund a giant $1.5 trillion tax cut. Not so much for Lam and Chan, who must grapple with the monetary crossfire.
All that defending, though, affords less time to alter Hong Kong's worrisome trajectory. Its experience back in 1997 is relevant here for two reasons. One, that was the last time markets wagered seriously, during the Asian crisis, that Hong Kong might scrap the peg. Two, economic inequality has widened markedly since then. Twenty years after the handover back to China, charity Oxfam labels Hong Kong one of the most inequitable places on the planet.
China's cash plays an outsized role in Hong Kong's deteriorating "Gini coefficient," a key income-gap metric. Its 0.54 reading is the highest in four decades, and the problem has intensified since '97. As mainland wealth pushed up property prices, local wages stagnated. That disconnect pushed living costs out of the reach of middle-class families and, increasingly, millennials.
Reporting on "mosquito-sized" flats is popular in local media. The same concerns inspired in the 2014 "Umbrella Revolution" protests that crippled the city for months. The risks of this tale-of-two cities vibe have not escaped those at the highest levels of the food chain. Before retiring in March, billionaire Li Ka-shing gave a series of speeches lamenting Hong Kong's lopsided wealth distribution.
Since then, China has played hardball, eroding Hong Kong's much-coveted autonomy. Press freedom has come under attack and hopes for electing the territory's top leaders, including chief executive, have been dashed. President Xi Jinping's government, meantime, chose uber loyalist Lam to lead Hong Kong through today's economic minefield.
Lam seems more focused on pleasing Xi than serving Hong Kong's 7.4 million people. She has refused to take a page from Singapore and raise the 16.5% corporate tax rate by one or two percentage points. Li is among the tycoons who support higher levies to fund new social welfare programs and education and training programs. Nor has Lam brought ample affordable housing on line, any more than did her predecessor Leung Chun-ying. Hong Kong is also avoiding alleviating the problem by imposing strict limits or sizable stamp duties on real estate purchases by mainlanders.
It is a touchy issue for Xi, of course. Hong Kong flats are a favorite vehicle for Communist Party bigwigs spiriting their millions -- or billions -- out of China. Though Xi is the strongest leader in generations, he risks losing support at home if Hong Kong real estate is out of bounds. Instead, Beijing has pushed to make it harder to find out who owns which Hong Kong properties and companies. All the while, China's great wall of wealth and its investors borrowing cheaply in Hong Kong are creating economic control problems.
Chan's predecessor at the HKMA, Joseph Yam made headlines in recent months by recommending an end to the dollar peg. Yam's basic argument: The more China eases capital controls, the more Hong Kong's "small" economy will be subsumed by "huge" waves of mainland money. More exchange-rate flexibility would enable Hong Kong to tame speculators, be they currency traders or property hoarders. The status quo means even less affordable housing and Hong Kong becoming more of an arbitrage vehicle than an economy.
Yam's views carry great weight because he assists Lam in policymaking as a member of the government's Executive Council. His most recent push is for the HKMA to work harder to track increases in U.S. rates to take froth out of property prices. Yam recommends the HKMA sell more so-called exchange-fund bills, a step that would mop up excess liquidity and boost borrowing costs.
It is troubling, though, that the HKMA is merely treating symptoms of Hong Kong's woes. To be fair, Yam did, too, dating back to 1997. He is probably best known as the man who then propped up stocks to the tune of $15 billion to defend the Hong Kong dollar and restore confidence in property markets. The chaos of that period bred timidity in Hong Kong leadership circles. Since then, policymakers reacted to every hiccup in growth by rescuing markets.
That markets-are-everything ideology also reduced the government's willingness to address the inequality bubble. In February, Hong Kong announced an $18 billion fiscal surplus, an amount double that spent defending the currency. So, Hong Kong surely has the resources to get its Gini coefficient below 0.4, the inequality level regarded as dangerous.
It is best, says Paul Yip, chair of population health at the University of Hong Kong, "to face the problems and respond to them in a timely manner and while we have the money." That means making more affordable housing a government priority, along with wider social safety nets and more affordable health care and education.
Too bad Hong Kong's energy and financial firepower are being squandered fighting 20-year-old threats, not working for a brighter economic future.
William Pesek is a Tokyo-based journalist and author of "Japanization: What the world can learn from Japan`s lost decades." He is a former columnist for Bloomberg and Barron's.