Hong Kong markets chaos as equity and currency swept up in selling onslaught

Local currency forwards dip to intraday low last seen in crisis of 1999

PUBLISHED : Wednesday, 20 January, 2016, 10:42pm
UPDATED : Thursday, 21 January, 2016, 9:16am

Capital outflows and concerns over the future of Hong Kong’s US dollar currency peg triggered a wave of selling yesterday, forcing Hong Kong dollar forwards down to their lowest intraday level since 1999 while sending the Hang Seng Index into a 750-point freefall.

Analysts cautioned that there is likely to be additional downward pressure in the weeks ahead, while the Hong Kong Monetary Authority will need to tap into its reserves to prevent the peg from weakening beyond its lower bound for the first time in 10 years.

The weak currency helped push interbank lending rates to their highest in five years, as three-month Hibor stood at 0.55 per cent, jumping 0.39 percentage point from last month.

The uptick in interest rates weighed negatively on property developer stocks, as the Hang Seng properties subindex fell 4.9 per cent, the most of any individual sector.

The Hang Seng Index closed at 18,886 points, down 3.82 per cent, shedding 749 points. The index is now down a third from its seven-year closing high of 28,588.52 points in April last year.

Markets in Shanghai and Shenzhen were down a relatively milder 1 per cent yesterday. However in percentage terms, the cumulative losses over recent months offer up a bleaker picture, with the Shanghai Composite Index down 42 per cent from its peak in June, while Shenzhen Composite Index is 19 per cent off its multiyear peak in June.

The sell-off coincided with a pessimistic International Monetary Fund report on the global economy.

In currencies, the Hong Kong dollar spot rate eased to 7.8241, its weakest since August 2007 when the US subprime crisis unfolded. The 12-month Hong Kong dollar forward contract was at 7.89, its weakest since 1999, indicating some currency speculators are placing bets on the outlier event of a reset in the local currency peg .

Under the linked currency system, in effect since 1983, the Hong Kong dollar is fixed at 7.8 to the US dollar. The HKMA will intervene when the currency trades at the upper 7.75 boundary or the weaker end at 7.85.

“Obviously there are some speculators trying to sell down the peg, dragging down the Hong Kong dollar. The weak currency has led investors to worry about more capital outflows and sparked selling as a result,” said Joseph Tong Tang, executive director of brokerage Sun Hung Kai.

The Hong Kong dollar and the stock markets were “the biggest pain points” in Asia, as speculation grows that the HKMA may not be able to keep the currency peg to the US dollar, said Angus Nicholson of IG Group.

An HKMA spokeswoman said it was not a surprise to see speculation on the peg from time to time. However, she reiterated the board’s commitment to defending the status quo.

“The HKMA has no plan and no intention to change the peg and will intervene in the market when needed.”