People who are worried about the Hong Kong dollar peg are wrong — it’s about interest rates

The peg to the greenback is stable. Rising rates are what should concern people.

PUBLISHED : Monday, 18 April, 2016, 2:47pm
UPDATED : Monday, 18 April, 2016, 2:47pm

People worried about Hong Kong’s currency peg at the beginning of this year. But they may have misplaced their concerns.

The peg is not they should worry about. It is interest rate rises.

The Hong Kong dollar has been pegged to its US counterpart at 7.8 to one. It dropped to 7.8294 on January 20. Under the peg, the Hong Kong Monetary Authority will intervene whenever the currency trades beyond the band of 7.75 to 7.85.

This happened after the US raised interest rates in December — the first time in a decade —and drew capital outflows from Hong Kong. The local stock market and currency both weakened.

So people have worried the peg is under attack from currency speculators. It was what we saw during the 1997 Asian financial crisis.

In reality though, the peg has been very stable since March. The Hong Kong dollar has traded close to 7.7535 to 7.7555 in the past few weeks. That’s close to this year’s strongest level of 7.7503 that was reached on January 4. That was due to the yuan’s stabilisation since March and that many currency speculators who had sold short the Asian currencies to wind up their positions.

Short selling is the belief that a security’s price will decline

So the currency peg is very stable and strong and there is no need to worry too much about it.

What we should pay attention is the interest rate because the interbank interest rate has risen since January and shows no signs of retreat.

According to a study by Credit Suisse, a private bank and wealth manager, the benchmark 3-month Hibor rate was on average at 0.4 per cent throughout 2012 to 2015.

Hibor — an interest rate stated in Hong Kong dollars on the lending and borrowing between banks in the Hong Kong interbank market — jumped to a six-year high of 0.69 per cent in January amid the capital outflow and the Hong Kong dollar turned weaker.

While the Hong Kong dollar has grown stronger recently, the Hibor has not gone down but the three-month Hibor has remained at the current level of 0.55 per cent.

The 12-month Hong Kong dollar Hibor is now 1.27 per cent compared with an average of about 0.9 per cent from 2012 to 2015.

The Hibor level is returning to 2009 levels. This is far from he peak of 5.7 per cent in the fourth quarter of 2007. Yet its gains will increase concern the interest rate will add to companies’ borrowing costs. It is not good news when we consider many retailers and restaurant operators have been struggling.

Rising interest rates, not the peg, is what we should worry about.