Hong Kong steps in to weaken the local dollar, as hot money inflows defy doomsday talk of capital flight after China’s security law

Hong Kong’s monetary authority sold HK$15.31 billion of local dollars on Monday and Tuesday to weaken the currency and bring it back within its trading band

Hong Kong’s de facto central bank had to intervene 24 times this year, spending up to HK$72.94 billion to maintain the dollar’s trading band

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A man changing currency in Sham Shui Po on May 29, 2020. Photo: Edmond So

Published: 2:12pm, 7 Jul 2020Updated: 10:54pm, 7 Jul 2020

Hong Kong’s monetary authority stepped into the financial markets to weaken the local currency on Tuesday, the 24th time this year it has had to rein in the effects of hot money and its first intervention since last week’s enactment of China’s national security law.

The city’s de facto central bank sold HK$15.31 billion (US$1.98 billion) of Hong Kong dollars on three occasions on Monday and Tuesday, buying the equivalent amount in US dollars to weaken the local currency’s exchange rate below 7.7500 per dollar, according to data released by the Hong Kong Monetary Authority (HKMA).

The episode shows how the inflow of money into Hong Kong continues to defy doomsday speculation of capital flight, as global investors position themselves for more than 20 initial public offerings (IPOs) in the city this month. Some high-net-worth individuals are also switching out of their US-dollar holdings and assets to seek shelter in other currencies including the Hong Kong dollar, as the White House considers imposing financial sanctions on Hong Kong’s banks and individuals in retaliation for the law.

“The IPO market remains piping hot, which continues to suck in hot money” in search of higher returns, forcing the HKMA to continue its interventions, said Bruce Yam, currency strategist at Everbright Sun Hung Kai Company Limited in Hong Kong. “Some of the wealthy people in town are also moving their assets away from the US”, in reaction to the rising tension between the US and China over Hong Kong, he said.

The Hong Kong dollar has been pegged at 7.8 to the US dollar since 1983, when the city was still a British colony. Since 2005, a trading band has been established to allow the local currency to strengthen to 7.7500 per dollar at the top end, or weaken to 7.8500 at the lower end. The HKMA must buy or sell the local currency accordingly to keep the exchange rate within the trading band to maintain the currency peg.

The monetary authority has sold HK$72.94 billion of the local currency in 24 interventions this year since April, raising the HKMA’s aggregate balance – which shows the banking sector’s liquidity – to HK$146.93 billion. The ample liquidity in the banking system has lowered the cost of money, causing the one-month interbank offered rate, or Hibor, to drop to about 0.4 per cent from 2 per cent in the first quarter.

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