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
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.
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.
All these factors combined to create a perfect storm last week for the Hong Kong dollar.
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.
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