Regional turmoil pressures HK$

Pressure ratcheted up on the Hong Kong dollar yesterday amid rising political tensions and further regional currency turmoil.

Hong Kong dollar one-year forwards jumped to 400 basis points above the spot price yesterday from 250 last Friday.

Analysts pointed to concerns about deteriorating relations between Washington and Beijing after a Chinese fighter plane crashed into the South China Sea after a brush with a United States patrol aircraft.

Meanwhile, currencies dropped throughout the region after Japan's survey pointed to the lowest business confidence in nine quarters. The yen dived to a 30-month low of 126.55 to the dollar before closing at 126.4, while the Singapore dollar slid further to close at S$1.8158 after breaching the S$1.80 level against the US dollar on Friday for the first time in three years.

'The [Japanese] survey weakened a lot of Asian currencies and that's putting upward pressure on Hong Kong-dollar forwards,' Bank of America strategist Frank Gong Fangxiong said. 'Another factor seems to be US-China tension. Because of the plane incident, people worry the relationship will get worse and hurt Hong Kong's economic interests.'

Beijing is fast losing export competitiveness as regional currencies hover near three-year lows.

China provided an anchor of security during the 1997-98 Asian crisis by not devaluing its yuan.

China's decision not to devalue might have been influenced by lobbying by the administration of former president Bill Clinton, but pundits wonder if the the administration of George W. Bush would have as much clout.

Mr Bush has taken a tougher stance on security-related issues in Asia and is weighing the decision whether to sell an advanced weapons system to Taiwan.

'Clinton played an important role in persuading China not to devalue,' Mr Gong said, adding that the Bush administration might not be 'listened to' as readily.

Hong Kong financial instruments had been running at a discount to US dollar equivalents for much of last year due to strong liquidity in the banking system as deposits outstripped lending. Some see the recent pressure on the Hong Kong dollar and interbank rates as a reversion to a normal state, as the local currency has traditionally offered a risk premium above the greenback.

'It's actually normal for the forwards to trade at a slight premium,' HSBC economist Geoffrey Barker said.

He said recent changes were a sign that surplus liquidity conditions in Hong Kong were eroding.

'This change is partly triggered by a weak yen, especially relative to the Hong Kong dollar, and global equity markets have been struggling a bit. However, I wouldn't want to overstate the pressure,' he said.

Until recently, the Hong Kong interbank offered rate has offered lower returns than the US dollar London interbank offered rate.

Analysts said much of the weakness in regional currencies had come as equities were cashed and amid the global flight to safety in the greenback. Speculative activity had also been curtailed by measures imposed by Indonesia, the Philippines and Thailand.

The resultant offshore liquidity problems were underlined yesterday when the offshore baht-swap market was suspended due to a liquidity freeze.

Graphic: hib03gbz