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HKMA

Hong Kong’s de facto central bank warns fund outflows will come ‘sooner or later’

PUBLISHED : Friday, 29 April, 2016, 11:35pm
UPDATED : Friday, 29 April, 2016, 11:35pm

Fund outflow from the Hong Kong dollar will come “sooner or later” so that the currency may again touch the weak side of the trading band under the Hong Kong dollar peg to the US dollar, warns the head of the city’s de facto central bank.

Norman Chan, chief executive of the Hong Kong Monetary Authority, said this could happen during “turbulent times” amid expected continuation of global macroeconomic uncertainty and fragile financial market sentiment.

This means preserving the capital of Hong Kong’s Exchange Fund, which is used to back the Hong Kong dollar and acts as a reserve to defend the Hong Kong currency against speculative attacks of the peg, will remain challenging.

“We should expect heightened uncertainty in the macroeconomic environment in 2016,” Chan wrote in a statement in the authority’s annual report released on Friday.

“As market sentiment remains fragile and jittery, any slight signs of trouble could trigger strong reactions in financial markets ... we must be prepared.”

He noted market views on the pace and timing of any further interest rate hike in the US after the first hike in almost 10 years last December remains divergent.

“Depending on the size of the interest rate differentials between the Hong Kong dollar and the US dollar and other fundamental factors, outflows from the Hong Kong dollar will occur sooner or later,” he added.

Under the peg, Hong Kong generally maintains its interest rate in line with US interest rate movements, a process managed by the HKMA through market intervention and other methods to control liquidity of the banking system.

The Exchange Fund recorded a loss of HK$15.8 billion last year, or an investment return of negative 0.6 per cent, due to a rare “triple whammy” of plummeting stocks, bonds and foreign currencies.

The HKMA quickened asset diversification by doubling the fund’s private equity and real estate investments to US$9.7 billion last year, in a bid to mitigate losses.

Chan received a total remuneration of HK$10.23 million last year, up 3 per cent from 2014, the annual report showed.

Separately, the HKMA said the Exchange Fund amounted to HK$3.5 trillion on March 31, HK$25.1 billion higher than the end of February.

Total deposits with Hong Kong’s authorised financial institutions grew 1.2 per cent last month, while total loans increased 0.7 per cent.