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Hong Kong Monetary Authority (HKMA)

HKMA head Norman Chan vows to defend Hong Kong peg with HK$3.3tn war chest

HKMA chief pledges ‘ability and sufficient reserves’ to defend 32-year-old Hong Kong dollar peg

PUBLISHED : Monday, 18 January, 2016, 1:33pm
UPDATED : Friday, 26 January, 2018, 4:14pm

The head of the Hong Kong Monetary Authority has vowed to defend the 32-year-old Hong Kong dollar peg even though it is facing up to US$130 billion of capital outflows due to last month’s US interest rate rise and the weak local economy.

“We have no plan, no intention, and have no need to change the peg link system which has served Hong Kong financial markets well over the past three decades,” HKMA chief executive Norman Chan Tak-lam said on the sidelines of the Asian Financial Forum meeting in Hong Kong yesterday.

“The HKMA is capable and is determined to keep the peg going on as the system keeps the Hong Kong dollar stable, which is the cornerstone of our economy.”

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The Hong Kong dollar fell to 7.80 against the US dollar at one stage Monday morning before bouncing back to 7.79 in the afternoon, its lowest level in four years, after falling by 0.36 per cent against the greenback last week – the most in 12 years.

Chan said capital was flowing out of Hong Kong, driving the currency lower.

“It is natural to see capital outflow from Hong Kong after the US increased its interest rate in December,” he said. “It is also because the Hong Kong economy is weak and the stock market has fallen.

“The HKMA has the ability and sufficient reserves to defend the peg even if some of the US$130 billion capital which has flowed into the Hong Kong markets in recent years leaves,” Chan said, added that outflows would force local interests rates higher in a gradual process.

The Hong Kong dollar is pegged to the US dollar at 7.80, and the HKMA will intervene whenever the currency trades beyond the strong end of 7.75 or weak end at 7.85.

The authority spent HK$227.15 billion to weaken the Hong Kong dollar in defence of the peg last year but this year it is likely to intervene for a different reason – to prevent it from becoming too weak. The last time the HKMA had to use its HK$3.27 trillion Exchange Fund to rescue the Hong Kong dollar from being too weak was in 2005.

Speaking at the same forum yesterday, Yue Yi, vice chairman and chief executive of Bank of China (Hong Kong), said the peg should stay on.

“Since Hong Kong’s handover, the linked exchange rate has contributed to Hong Kong’s progressive development,” he said. “I believe the foundation for its continued existence is still intact. There is no need to worry about significant outflow.”

Meanwhile, Beijing’s deputy foreign minister reaffirmed at the forum yesterday that Hong Kong can play “a super connector” role as China seeks more cooperation and development opportunities in Asia, Africa and Europe.

Liu Zhenmin’s remarks came two months after Ou Xiaoli, a counsel from the National Development and Reform Commission, said he was “sceptical” about Hong Kong’s ambition to form the bridge between the mainland and the rest of the world under President Xi Jinping’s “One Belt, One Road” strategy - which spans 65 countries on three continents.

Yesterday, Liu said: “Hong Kong possesses unique advantages on the economic, geographical and talents front … it can play a ‘super connector’ and a significant role in ‘One Belt, One Road’.”

Chief Executive Leung Chun-ying also said Hong Kong has “the experience, the expertise and the connections to serve as the Belt and Road’s fundraising and financial-management hub.”