Despite weak Hong Kong dollar, city’s assets remain strong, thanks to HKMA intervention
Nigel Green says the factors pushing the Hong Kong dollar down to the low end of the trading band of its US dollar peg may cool market sentiment for now, but the longer-term prospects are sound
Global financial markets watched the Hong Kong dollar fall to a 35-year low last Thursday, slumping to HK$7.85 against the US dollar, to which it is pegged.
Nervous investors looked on, waiting to see if the Hong Kong Monetary Authority would step in. It did; the city’s de facto central bank used its reserves to prop up the currency, thereby reducing its aggregate balance to HK$179 billion. It was the first time the Hong Kong dollar has triggered the weak side of the trading band since the band was set in 2005.
The ongoing downside pressure, due largely to the widening chasm between the interest rates of Hong Kong and US dollars, is something international and domestic investors have been keeping a close eye on in recent months.
Indeed, the situation has reignited the debate on whether the Hong Kong dollar should remain pegged to the US dollar. With both sides of the argument once again airing their standpoints, it was an issue that compelled the head of the International Monetary Fund, Christine Lagarde, to speak out last week. The pegging mechanism “is consistent with the fundamentals of the economy”, she said. “We certainly don’t see in the near future the pegging of the Hong Kong dollar to another currency, other than the US dollar.”
Despite all the brouhaha, and thanks to the HKMA’s buying spree, investors should now be reassured that the currency peg of HK$7.80 to US$1 remains a cornerstone of the city’s economic framework.
The move demonstrates the resolve of the HKMA to mop up excess liquidity before it fuels inflation and becomes problematic.
By reducing the quantity of Hong Kong dollars in circulation, the price – that’s to say the interest rates charged – rises. Indeed, the Hong Kong dollar interbank lending rate, known as Hibor, rose instantly on the HKMA’s intervention and this in turn will put pressure on banks to raise their prime lending rates.
Recent Hong Kong dollar weakness reflects excess liquidity in the currency in the local economy.
In part, this reflects strong mainland Chinese and international investment flows into the city, particularly into property.
Perhaps nowhere is the more apparent than in commercial real estate and government land. According to CBRE, the real estate consultancy, mainland investors have increased their market share in this space from 9 per cent in 2013 to 25 per cent last year. Elsewhere, fuelled by strong demand for smaller flats, home prices surged for the 21st consecutive month in December.
Meanwhile, the United States has been busy raising interest rates. As has been widely anticipated, in March, the Federal Reserve announced a rate hike of 25 basis points, taking the benchmark interest rates to a new range of 1.5 per cent to 1.75 per cent. This reduces the supply of its currency.
According to the minutes of the last Fed meeting, it now also appears that officials are pushing for a faster pace of tightening this year due to their increasing confidence in the growth outlook and ability to reach their inflation target. “The appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected,” the Federal Open Market Committee said in the records of its meeting on March 20-21.
In addition, in recent weeks, nervousness over the prospect of reduced China-US trade has added further pressure on the Hong Kong dollar. Hong Kong is seen as particularly vulnerable to trade wars – more so than the Chinese mainland – given the importance of international trade to its economy.
All these factors combined to create a perfect storm last week for the Hong Kong dollar.
The fallout of the Hong Kong dollar plummeting in the near term could mean that real estate values will be hit due to higher interest rates for property owners in Hong Kong. Indeed, Financial Secretary Paul Chan Mo-po said last week on his blog that Hongkongers should not expect that the “environment of super-low interest rates will persist forever” and that investors “have to consider the possibility of a rise in the borrowing costs, and the impact of higher interest rates on asset prices and their investments”.
Despite the monetary authority having stepped in to prop it up, at the beginning of this week, the Hong Kong dollar remained stubbornly at the weaker end of its currency band.
Monday’s fall of 1.6 per cent on the benchmark Hang Seng Index reflected continuing investor nervousness over the prospect of tighter monetary policy from the HKMA as it defends the currency peg with the US dollar, and over the current volatile geopolitical and trade environment.
However, in the longer term, the monetary stability that is brought about by the HKMA’s action will continue to underpin the desirability of owning Hong Kong assets.
Nigel Green is founder and CEO of deVere Group