For the first time in 40 years the city will draw from its peg defense reserve — and the destination reveals everything
A Line That Has Not Been Crossed in Four Decades
When Hong Kong Financial Secretary Paul Chan Mo-po announced on February 25, 2026, that the government would withdraw HK$150 billion (approximately US$19 billion) from the Exchange Fund, he did something no financial secretary had done since 1984. The Exchange Fund is the bedrock of Hong Kong’s financial system. It is the reserve that backs the Hong Kong dollar’s peg to the U.S. dollar, the mechanism that has underpinned the city’s identity as a global financial center for more than four decades. Tapping it — even from its surplus rather than its core reserves — is a decision laden with symbolism that goes far beyond fiscal arithmetic.
What the Exchange Fund Is and Why It Matters
The Exchange Fund was established to maintain the Hong Kong dollar’s linked exchange rate, currently pegged in a band of 7.75 to 7.85 Hong Kong dollars per U.S. dollar. The Hong Kong Monetary Authority actively defends this band by buying and selling Hong Kong dollars, deploying the fund’s vast reserves when necessary. The fund survived the 1997-98 Asian financial crisis, during which speculators attacked the peg. It survived the 2008 global financial crisis and repeated subsequent speculative raids. Its consistent defense of the peg is one of the principal reasons international investors trust Hong Kong-denominated financial instruments. The HKMA’s documentation of the Linked Exchange Rate System explains how the fund operates as the ultimate backstop for monetary stability. The HKMA confirmed after the budget announcement that the fund still held sizable surplus and foreign currency reserves and that the withdrawal would not compromise the peg’s stability.
Where the Money Is Going
Chan said the HK$150 billion would go toward the Northern Metropolis, a massive government vision for developing rural land along Hong Kong’s border with Shenzhen into a technology and innovation hub. The budget proposed seeking legislative approval for a total of US$3.63 billion across three zones including the San Tin Technopole. A separate HK$20 billion allocation was proposed for the cross-border Hetao innovation hub. These projects are not merely real estate developments. They represent a strategic choice to define Hong Kong’s economic future in terms of its geographic and institutional integration with mainland China.
The Political Meaning of This Decision
The decision to tap the Exchange Fund is being presented as prudent infrastructure investment. But it carries political implications the financial secretary’s measured language obscures. The Exchange Fund was built and maintained precisely to give Hong Kong the financial independence to weather crises without depending on Beijing. It was the institutional expression of the city’s monetary sovereignty. Using it to fund projects explicitly designed to deepen integration with mainland China — the Northern Metropolis is fundamentally a vehicle for connecting Hong Kong’s economy with Shenzhen and the Greater Bay Area — represents a philosophical shift in how Hong Kong’s government conceives of its reserves. Those reserves are no longer simply a defense fund. They are now also an investment vehicle for national integration projects.
Democratic Oversight Is No Longer What It Was
The decision requires approval of the Legislative Council. But Hong Kong’s legislature, following the 2021 electoral overhaul that eliminated direct democratic competition, is now composed almost entirely of figures who support the government’s agenda. Human Rights Watch has documented how the 2021 electoral changes eliminated meaningful opposition from Hong Kong’s legislative process, replacing competitive elections with a system that ensures loyal majorities. The Exchange Fund tap will be approved. The question that cannot be asked in LegCo is whether spending the city’s monetary reserve on projects that serve Beijing’s integration agenda is the right use of a fund built to protect Hong Kong’s independent financial identity.
Stability, Competitiveness, and the Long View
The fiscal rationale for the budget is broadly sound. The operating account has returned to surplus after three years of deficits. The Consolidated Account surplus in 2025-26 reached US$2.9 billion against an originally projected deficit of US$8.7 billion. Revenue was lifted by a buoyant equity market and accelerating growth. Fiscal reserves are projected to grow toward 700 billion Hong Kong dollars by 2030. The immediate financial risk of drawing on the Exchange Fund surplus is low. What is being spent is surplus accumulation, not the core reserves that defend the peg. The IMF’s most recent Article IV consultation affirmed Hong Kong’s strong external position and noted ample reserves relative to any foreseeable need. But the precedent is real. The first withdrawal from the Exchange Fund in 40 years creates a template for future withdrawals. The argument that the fund exists purely as a defense mechanism becomes harder to sustain once it has been used as an investment fund, however worthy the stated purpose. For those who care about Hong Kong’s financial independence and its meaning, that is the detail worth watching in this budget.
Senior Journalist & Editor, Apple Daily UK
Contact: athena.lai@appledaily.uk
Athena Lai is a senior journalist and editor with extensive experience in Chinese-language investigative reporting and editorial leadership. Educated at a leading journalism school in the United Kingdom, Athena received formal training in fact-checking methodology, editorial governance, and international media standards, grounding her work in globally recognized best practices.
She has held senior editorial roles at Apple Daily and other liberal Chinese publications, where she oversaw coverage of Hong Kong civil liberties, diaspora politics, rule of law, and press freedom. Athena’s reporting is distinguished by disciplined sourcing, cross-verification, and a clear separation between factual reporting and opinion, reinforcing reader trust.
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