Despite the recent fund outflows and softness of the Hong Kong dollar, the Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, appears to be pretty relaxed about the situation.
Using “Stay calm on the weakening of the Hong Kong dollar” as the headline, HKMA Chief Executive Norman Chan wrote in a blog-post Thursday that following successive rate hikes in the US and the subsequent widening of interest rate spreads in favor of the greenback, “it is only natural that the Hong Kong dollar would weaken as a result.”
As much as US$130 billion has flowed into Hong Kong since the US Federal Reserve started its QE program in 2009, Chan pointed out.
Such massive capital inflow had been propping up Hong Kong dollar, which for a period had been trading close to the higher end of the trading band at 7.75 per dollar.
Despite the currency softness now, the Hong Kong interbank offered rate (Hibor), or the short-term borrowing costs between commercial banks, has continued to fall back. That shows the city still has ample liquidity.
Still, we must bear in mind that the Fed has introduced five rate hikes since late 2015, and the Fed fund rate has risen to 1.25 percent to 1.5 percent at present. More funds will be attracted by the higher US dollar interest rate.
The city’s banking system balance with HKMA now holds less than HK$180 billion, compared with the peak of over HK$400 billion in 2015.
A number of extra factors have also speeded up the fund outflow, including the Trump administration’s large-scale tax cut last year and the recent concern about a global trade war, which prompted global investors to pull capital out of emerging markets.
Hong Kong dollar started to weaken sharply since November last year. It even hit close to the lower end of the trading band at 7.85 per dollar recently.
Chan urged calm and said the HKMA has sufficient firepower to defend the currency.
“The resilience of banks and financial system in Hong Kong has been greatly enhanced. The Exchange Fund of Hong Kong holds over HK$4 trillion worth of assets,” he said. The HKMA acts as a “super money changer” to cope with potential asset market volatilities and fund outflows, he added.
In fact, this provides an opportunity to “allow the Monetary Base to contract gradually and create an environment conducive to the normalization of Hong Kong dollar interest rates,” Chan noted.
Over the longer term, Hibor looks set to climb, and people with mortgages better get prepared.
This article appeared in the Hong Kong Economic Journal on March 9
Translation by Julie Zhu
[Chinese version 中文版]
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