Bad news for Hong Kong currency short-sellers as Barclays sees peg status quo while yuan shortcomings hinder repeg
- Speculation on peg change is ‘premature’, as the yuan is not yet freely convertible and yuan products for the Exchange Fund to invest in are lacking
- BIS top boss also told the Post that the peg has given Hong Kong ‘certainty’ and ‘monetary stability’
Hong Kong is unlikely to abandon its US dollar peg any time soon, or to link the Hong Kong dollar’s value to the yuan, because either move would threaten stability and the Chinese currency does not fulfil preconditions set by the monetary authority, according to Barclays Bank.
“For now, we see no change to the Hong Kong dollar peg, and in our view policymakers have little reason to make such a significant change when both China and Hong Kong are slowing and foreign capital is already flowing out,” the UK bank’s Singapore-based foreign-exchange strategists Lemon Zhang and Ashish Agrawal said in a report on Thursday.
A fully convertible yuan and an open capital account with no controls are among four criteria necessary for the city to consider repegging its currency. The third is a deep financial market traded in yuan, which allows Hong Kong’s Exchange Fund to hold assets in the currency to support the local monetary base. The final condition is synchronised economic cycles between Hong Kong and mainland China.
“Many of those criteria remain unsatisfied,” they said. “Market speculation on de-pegging, or repegging with CNH (offshore yuan), seems premature.”
Even if the Chinese authorities could eventually link or unify the Hong Kong dollar with the CNH after fulfilling all the preconditions, “this is likely to be a long-term proposition, with ample warning so that investors are not caught unaware”, the strategists said.