HONG KONG (MarketWatch) — Last week’s July 1 protest march was one of the biggest ever recorded in Hong Kong, yet it presented a conundrum: If political tensions are really at the breaking point, why is foreign money flooding in rather than heading for the exits?

The Hong Kong Monetary Authority (HKMA) reported it intervened to the tune of $2.1 billion to support its pegged currency for the first time in 18 months, seeking to curb the rise of the Hong Kong dollar USDHKD, -0.00% against the greenback.

Shutterstock/Norman Chan

Money should be going in the opposite direction if we listen to the “Big Four” accounting firms. Last week, they collectively took out newspaper advertisements to warn that pro-democracy protests could lead to international businesses and capital leaving Hong Kong.

One explanation aired was that investors have been buoyed by the efficiency with which local police rounded-up rogue demonstrators, meaning there was now less to fear about subsequent “Occupy Central” public-disobedience protests.

Here’s another interpretation: These fund inflows and heightened levels of social unrest are not coincidental — international capital is placing bets the Hong Kong dollar peg could also be close to the breaking point.

It is often assumed the peg cannot be broken on the upside, as the Hong Kong establishment is comfortable with the resultant higher prices, which means higher property revenues. But some investors have argued that there is a breaking point, at which peg-induced higher prices become unbearable to the local population and lead to severe social unrest.

We could now be close to that trigger. Mounting evidence suggests that the three-decades-old currency regime lies at the root of so many underlying social, economic and political conflicts in Hong Kong. Initiate reform here, and Beijing can expect the political temperature to cool.

Indeed, back in September 2011, Pershing Square hedge-fund manager Bill Ackrman argued in a 150-page presentation that a Hong Kong dollar revaluation would pay political dividends by demonstrating that Beijing was serious about addressing local tensions and the political divide. That divide includes unaffordable property, widening income inequality and a huge influx of bargain-hunting mainland Chinese shoppers playing currency arbitrage.

While Ackman has clearly been too early in his call for a 30% currency appreciation, many of his trigger points are not just still in play, but are now even stronger.

The peg contributes to high prices through rapid expansion of Hong Kong’s monetary base, imported low short-term rates and the diminished purchasing power of the currency.

Today, these factors continue to add to Hong Kong’s pressure cooker of higher prices.

Once again, the Hong Kong dollar’s anchor currency — the U.S. dollar DXY, +0.03% — is undergoing a period of weakness. This means it is punching below its weight in term of purchasing power, which has a large impact on the cost of imports, particularly in the critical food sector, given that Hong Kong imports 90% of its food. Recent statistics show that the lowest-quartile income group already spend 41% of income on food, underlying the political sensitivity.

Hong Kong’s weak currency has a particularly magnified impact next to the stronger yuan USDCNY, USDCNH, -0.09% , as integration with the motherland has accelerated in recent years.

Even three years ago, Ackman noted that the depressed local currency was supercharging visitor flows from mainland China and pressuring local prices upwards. Since 2011, those 27 million visitors a year from the mainland have turned into an avalanche of 40 million (or nearly six times the local population) last year. This has proved another headache for Hong Kong’s government, as the territory struggles to cope with such numbers.

Meanwhile, the most widely discussed peg distortion from imported low interest rates has been the amplified impact on the property and banking sectors in Hong Kong. Now this is raising new concerns, as its has fuelled a potentially destabilizing surge in cross-border lending.

Ultimately, when so many are not benefiting from an economic regime in which growth appears to only mean higher prices, it makes calls for political reform that much louder.

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Ackman argues that with one revaluation of the Hong Kong dollar, many of these ills would be taken care of.

The purchasing power of citizens would instantly rise, while the cost of food imports would drop immediately. Real-estate speculation should moderate, and rents would stabilize over time. Tourist numbers would fall, as there would no longer be currency-arbitrage gains.

The difficulty is that China and many entrenched local business interests benefit from the status quo, where Hong Kong is a source of cheap financing and shopping.

But one way or another, it does not look sustainable. Beijing might well conclude reform of the Hong Kong dollar peg will be a lot less trouble than a protracted battle over democracy.

So if you want to benefit from growing turmoil in Hong Kong, it could be worth buying some Hong Kong dollar assets.

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