Hong Kong’s banking system holds up, as financial war chest expands and capital remains even if protest rallies deter tourists
- The size of the Exchange Fund grew by 0.02 per cent, or an increment of HK$700 million, to HK$4.138 trillion at the end of July, according to data by the Hong Kong Monetary Authority
- The financial system’s aggregate balance, an indicator of banking liquidity, dipped by 0.06 per cent in July to HK$54.24 billion from a month earlier
Hong Kong’s financial system is holding up against 12 weeks of unprecedented public unrest in the city, as the government’s war chest grew while capital remained in China’s main offshore banking centre even as tourists and visitors stayed away amid increasing reports of violence.
Total deposits in the city’s banks and financial institutions shrank in July by HK$4.39 billion, or 0.03 per cent, to HK$13.603 trillion, the data showed. Compared with the same month a year earlier, July’s deposits rose 5.1 per cent.
“There may have been some outflow but the situation is not that worrying when compared with the Asian Financial Crisis of 1997 and 1998,” said DBS Bank’s managing director Tommy Ong. “The HKMA has sufficient assets in the Exchange Fund to defend the exchange rate of Hong Kong dollar, which has remained stable in recent months.”
To be sure, capital had been flowing out of Hong Kong since 2016, when the US Federal Reserve reversed a decade of cheap financing by raising interest rates, said Bruce Yam Hiu-ping, forex strategist of Everbright Sun Hung Kai in Hong Kong.
“The drop of deposit and aggregated balance reflect some capital outflow, where some investors may have shifted some of their Hong Kong deposits overseas into stocks or property purchases, as the protests in the city started to turn violent,” he said.
The aggregate balance peaked at HK$391.34 billion at the end of 2015, a result of the hot money that flowed into Hong Kong’s real estate and stock markets, giving oxygen to an asset bubble that produced the world’s most expensive property market.
Record property prices have created the least affordable housing market on earth with one of the developed world’s widest income gaps, a major cause of the anger that seethes under one of Asia’s most prosperous urban centres as protesters enter their 12th week.
Some hedge fund managers, such as Hayman Capital Management's Kyle Bass, Crescat Capital's Kevin Smith and Trium Capital's Thomas Roderick, are eyeing whether the unrest in Hong Kong will spur capital flight, drive up interest rates and force the city to drop its currency peg against the US dollar.
During the Asian financial crisis, short sellers tried to attack the peg by selling both the stock and currency markets, leading to a sharp rise in interest rate, driving the one-month Hong Kong dollar interest rate, or Hibor, to 20 per cent.
Hong Kong’s stock price tumbled by half during the 1998 crisis while property prices plunged 60 per cent between 1998 and 2003.
By comparison, the benchmark Hang Seng Index only dropped about 5 per cent since this year’s protests begun on June 9 but remain the same level at the beginning of this year.
“The social unrest and economic outlook may be gloomy, but it has not triggered a financial crisis in Hong Kong yet,” Ong said. “There has been a lot of speculation about people moving their money to other markets, but the data shows a massive outflow is not happening.”