What the Hong Kong dollar is experiencing now in the market is very similar to the story of the renminbi.
The renminbi exchange rate is benchmarked against a basket of 13 currencies. The greenback has a 26.4 percent weighting in it, the euro 21.39 percent, the Japanese yen 14.68 percent and the Hong Kong dollar 6.55 percent.
The HKD has been pegged to the US dollar since October 1983. It has successfully survived several crises.
The Hong Kong Monetary Authority (HKMA) maintains the HKD within a band of 7.75 to 7.85 against the USD.
Although the HKD and renminbi have different pricing systems, exchange rate stability is the aim in both cases.
Since the renminbi is not yet freely convertible, there are separate onshore and offshore markets for the currency.
The onshore market is the home market for the renminbi. The offshore market ultimately relies on the onshore one, where Chinese regulators are more influential.
Since the beginning of the year, the A-share market and the renminbi exchange rate have been dragged down by China’s slowing economic growth and capital outflows.
Based on my experience as a trader, the government will win the battle with the market in the short term, as it holds powerful monetary and policy tools.
In the past two weeks, the People’s Bank of China managed to narrow the spread between the onshore and offshore renminbi exchange rates from a historic high.
To further calm the market, the PBoC is rumored to have required some mainland and foreign banks to maintain capital inflows.
The market responded with a weakening of the HKD. The currency fell to 7.82 against the USD Wednesday morning, and the Hang Seng Index dived more than 700 points to below 19,000.
The peg to the USD is still the best choice for the HKD in the present situation.
There is no doubt the HKMA can and will defend the peg.
However, the city is tightly linked to the mainland.
With more interventions by Beijing in the renminbi exchange rate and administrative measures to avoid capital outflows, Hong Kong’s stock market and the HKD exchange rate may become indirect means to speculate on the mainland markets and the renminbi.
During the Asian financial crisis in 1997, the HKMA boosted the overnight interbank interest rate (HIBOR) to 3 percent to curb speculation about a potential depegging of the HKD from the USD.
The recent hike in the renminbi interbank rate in offshore market is another example.
Speculators are like sharks. Once they detect a drop of blood, they rush to it.
The turbulence in the global economy and politics may lead to higher volatility in the HKD.
This article appeared in the Hong Kong Economic Journal on Jan. 21.
Translation by Myssie You
[Chinese version 中文版]
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