So long as SAR authorities use higher interest rates to defend the peg, business will suffer and asset prices will be hurt, shrinking Hong Kongers' wealth on paper. Doubts have naturally arisen about the wisdom of maintaining the currency link. To delink now would be calamitous. Such a move would leave too many businesses exposed to the vagaries of the currency markets, especially under the present volatile conditions. It would cause rapid devaluation and massive capital flight into other currencies, further depressing stocks and property prices.
Social unrest is likely.
And that, in turn, would deepen Beijing's dilemma over intervention. But when the typhoon passes, Hong Kong has reason aplenty to reconsider the peg. In the short term, keeping the link means the SAR's competitiveness will suffer relative to its Southeast Asian neighbors with their devalued currencies. In the longer run, as the SAR's economy integrates further with the mainland's, it would be an anomaly for such a key part of China to have its interest rates effectively set by the U.S. Federal Reserve System through the dollar link. Moreover, the local dollar would remain vulnerable to speculative assault.