Systemic risk answers sought as HKMA intervenes on currency

Hong Kong Monetary Authority bought US$2.099 billion within the past 24 hours at HK$7.75 a dollar, the upper limit of a convertibility range that triggers intervention.

PUBLISHED : Wednesday, 02 July, 2014, 11:30am
UPDATED : Thursday, 03 July, 2014, 4:20am

Lawmakers are demanding answers from the government on measures to bolster the city’s financial system stability as it emerged 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 (HKMA) said it bought US$2.099 billion within the past 24 hours at HK$7.75 a dollar, the upper limit of a convertibility range that triggers intervention.

News of the HKMA’s actions came ahead of an expected statement from Secretary for Financial Services and the Treasury, Chan Ka-keung, about the health of the city’s financial system in response to a written question on the subject from legislator Ng Leung-sing.

Ng’s question follows up on an International Monetary Fund (IMF) 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.

Ng wants to know if authorities have carried out an assessment of risks highlighted by the IMF, what measures are in place to ensure the resilience of the financial system and whether any new policy actions to external risks are being planned.

The exposure of Hong Kong’s banks to mainland companies has soared since the middle of last year, when a tightening of onshore liquidity saw many mainland firms looking offshore for funding.

The HKMA stepped up its supervision of Hong Kong-based banks’ credit risk management last month, asking them to show they had stable funding requirements and agree to regular stress testing and on-site examinations of credit underwriting processes.

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 Hong Kong dollar’s currency board peg to the greenback means the city is effectively a hostage to US monetary policymaking. 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 driver 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 in a statement.

Hong Kong pegged its currency to the US dollar in 1983 when negotiations between Beijing and London over the city’s return to Chinese rule spurred capital outflows. In 2005, policy makers committed to limiting the currency’s decline to HK$7.85 per dollar and capping gains at HK$7.75.

When the Hong Kong dollar reaches the so-called strong end of the trading range, the HKMA buys US dollars to prevent further appreciation.