HKMA on alert as it defends peg in first currency market intervention in 18 months
First intervention in 18 months as authority monitors potential shocks from mainland and risk of fallout from US Fed's tapering policy
The government has vowed to ensure the stability of the city's financial system in the face of external risks as it emerged yesterday that authorities had been forced to intervene in currency markets for the first time in 18 months to defend the peg to the US dollar.
The Hong Kong Monetary Authority bought US$2.1 billion to help curb the rise of the Hong Kong dollar against the greenback, after the local currency had been pushed to the upper limit of the range that triggers intervention to support the peg.
Secretary for Financial Services and the Treasury Chan Ka-keung said the HKMA had been actively working to safeguard the city's systemic stability.
Chan's comments came in a written reply to a question from lawmaker Ng Leung-sing about the health of the city's financial system.
Ng's question followed up on an International Monetary Fund report in May which highlighted growing exposure of the city's financial system to potential shocks from the mainland and the risk of fallout from an anticipated tightening of US monetary policy.
"We share the IMF's view that the major external risk is the uncertainty concerning the pace and scale of the US Fed's tapering and the interest rate normalisation process," Chan wrote in his reply, which was posted on the Legislative Council website.
The Hong Kong dollar's currency board, in place since 1983, means the city is effectively a hostage to US monetary policy. The Federal Reserve's programme of quantitative easing has seen capital flood into the city's asset markets in recent years and is widely blamed as a major cause of sky-high property prices.
The renewed strength of the Hong Kong dollar shows that inflow pressures remain intense and analysts predict they could strengthen if the mainland economy begins to show signs of recovery from a slowdown in the first quarter of the year.
"We will monitor the market developments closely and maintain the stability of the Hong Kong dollar in accordance with the currency board arrangements," the HKMA said.
Chan sought to play down worries, saying that the HKMA had "implemented various measures in monitoring systemic risks and performed stress tests on an ongoing basis to assess the financial system's, as well as individual financial institutions', capacity to withstand shocks."
Chan did concede that "a significant change in fund flows due to any global financial market volatility… could impact on our property market", but added that a series of market cooling steps - including several property stamp duties - had been imposed to help manage real estate risks.
Regarding the risks related to the mainland, Chan said the HKMA had taken measures to control credit risks for Hong Kong banks' increased lending to non-bank mainland entities.
A 44.5 per cent annual surge in total loans in the Hong Kong banking sector in January prompted the HKMA to introduce its Stable Funding Requirement, which requires banks to increase their deposit base if their loan book grows by more than 20 per cent per year.
The exposure of local banks to mainland companies has soared since the middle of last year, when a tightening of onshore liquidity saw many mainland firms look offshore for funding.