HKMA warns of capital outflow as US stimulus ends
Norman Chan says HK$100 billion that has flowed in since the financial crisis will exit city
The Hong Kong Monetary Authority has warned of capital outflows and volatility on the bond and equity markets once the United States starts to taper its quantitative easing scheme after nearly five years.
About HK$100 billion had flowed into the banking system since the financial crisis in 2008, Norman Chan Tak-lam, the chief executive of the Monetary Authority, told a financial summit yesterday.
That capital would "inevitably" flow out if the interest rate cycle in the US changed, and Hong Kong had to face the outflow pressure just like other emerging markets, Chan said.
"The market is filled with uncertainties, and the investment environment is quite complicated," he said.
Chan said there would not be a specific timetable for the tapering or total exit from the quantitative easing scheme, as the timing would be determined by the condition of the US economy.
Yet markets have been expecting the US Federal Reserve to officially announce the tapering of its treasury bond purchase plan after the Federal Open Market Committee meeting on September 18.
The US reported solid jobs and services sector data on Thursday, with new jobless claims falling to a nearly five-year low. The ISM non-manufacturing index, which reflects business conditions in the services sector, jumped to a seven-year high.
But yesterday it reported a slowdown in hiring.
Quantitative easing through Fed purchases of bonds was introduced during the global financial crisis to increase money supply and boost lending to revive the economy. The scheme has helped keep government borrowing costs and mortgage rates around the world low. An exit from it would push up rates.
The HKMA is "closely watching" the US central bank for signs of its readiness to exit the scheme and is gauging its likely impact on the markets, Chan said.
Asked whether emerging markets would experience another sell-off like the one in June, he said this time the impact could be smaller, as the Fed initially was likely to make just a mild reduction in the size of its bond purchases.
Chan also said the HKMA had been working on strategies to cope with volatile markets to maintain the safety of the city's foreign exchange reserves. In July, Hong Kong had US$299.9 billion in reserves.
Up to 79 per cent of the assets in the Exchange Fund, which is used to manage the reserves, was denominated in US dollars last year, the HKMA said in its annual report.
The bulk of the fund, under the "backing portfolio", was invested in highly liquid US dollar-denominated assets, while another portfolio was invested in the local market, the report said.