Hong Kong dollar suffers biggest weekly drop in 12 years amid capital outflow concerns

Experts warn local currency is likely to be squeezed by additional capital flight in months ahead

PUBLISHED : Friday, 15 January, 2016, 10:56am
UPDATED : Saturday, 16 January, 2016, 2:43am

The Hong Kong dollar ended Friday having suffered its worst week of declines in 12 years as investors yanked massive sums out of Hong Kong stocks, while analysts believe further outflows will add to borrowing costs, further weighing on the local economy.

The Hong Kong dollar traded at 7.7930 against the US dollar at 8pm on Friday, bringing its loss for the last two trading sessions of the week to 0.4 per cent. For the full week, the Hong Kong dollar ended down 0.36 per cent, the most since October 2003.

Hong Kong Financial Secretary John Tsang Chun-wah said on Friday he expects the Hong Kong dollar may weaken amid expectations of more capital outflow from the city.

“The US interest rate hiking cycle has begun which will lead to capital outflow from the Hong Kong market. It is natural that the Hong Kong dollar would be weaker,” Tsang said in Hong Kong.

Tsang also said the central government had responded favourably to the city’s intention to join the China-led Asian Infrastructure Investment Bank, adding that the bank’s board of governors would discuss its future plans during the inaugural gatherings on Saturday and Sunday.

“Since there was a lot of capital flow in the Hong Kong market earlier, it is natural this money would leave the market at some stage. The government will closely monitor the market situation,” Tsang said.

Jasper Lo, director of Tung Shing Futures, said the capital outflow adds us to a liquidity shortfall and may prompt banks to increase their interest rate faster than expected. Local banks had been expected to track the US Fed rate hike around midyear, but the thinking is that these hikes may be brought forward.

Joseph Tong Tang, director of SHK & Co, said: “International investors are taking money out of Asia as a whole. The capital outflow will continue which will hurt the stocks markets in Hong Kong, China and Asia.”

The Hang Seng Index ended the week with a 4.6 per cent loss.

A Hong Kong Monetary Authority spokeswoman said yesterday the government has no intention to change the peg “which continues to serve Hong Kong well. We see no need and have no intention to change the system.”

Whenever the Hong Kong dollar reaches the weak end of 7.85, the HKMA will intervene to buy in Hong Kong dollar and to sell the US dollar to defend the peg
Norman Chan Tak-lam

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The peg, introduced in 1983, linked the Hong Kong dollar to the US dollar at 7.80. The HKMA will intervene if it trades beyond 7.75 or 7.85 per US dollar.

HKMA chief executive Norman Chan Tak-lam warned in December that hot money inflows to the city, estimated at US$130 billion in the last few years, could begin to exit as the Fed initiates its gradual interest rate tightening cycle.

“Whenever the Hong Kong dollar reaches the weak end of 7.85, the HKMA will intervene to buy in Hong Kong dollars and to sell the US dollar to defend the peg. The last time for the HKMA to defend the currency amid a fall to the weak end was 10 years ago.”

Credit Suisse senior currency strategist Heng Koon How said the Hong Kong dollar always weakens after the US bumps up the interest rate.

“Of course this time round, there are increasing concerns about the health of Hong Kong’s economy due to China’s slowdown and volatility,” he said.