The Hong Kong Monetary Authority will issue HK$20 billion of Exchange Fund bills next month so that banks can mop up excessive Hong Kong dollar liquidity after many yuan depositors exchanged their yuan into the local currency recently.
The authority announced on Tuesday it would issue a total of HK$20 billion of Exchange Fund bills in three-month and six-month tenors that will be offered to banks by tenders on October 6, 13, 20 and 27.
The HKMA said the issuance was designed "to meet the increased demand for the paper by banks given the abundance of liquidity in the banking system" and "to meet the strong demand for Exchange Fund paper by banks for liquidity management".
Jasper Lo Cho-yan, a director of Tung Shing Futures, said the HKMA had made the move because it had injected a lot of liquidity in the banking sector through many money market interventions this month to weaken the Hong Kong dollar.
"The devaluation of the yuan has led many depositors to exchange their yuan into Hong Kong dollars, which has led the Hong Kong dollar to trade at the strong end of the peg and forced the HKMA to have to sell the Hong Kong dollar to weaken the currency," Lo said.
"These interventions have led the banking sector to have excessive Hong Kong dollar liquidity and the HKMA has to issue the new Exchange Fund paper to mop up the liquidity."