Capital outflows amid Hong Kong’s protests could have caused record drop in forex reserves, analysts say

Money being taken out of Hong Kong amid the anti-governments protests, as well as China’s cooling economy and the mainland’s trade war with the United States, could have been the cause for the city’s foreign exchange reserves posting their biggest monthly drop on record in August, analysts said.

Foreign exchange reserves fell from a record high of US$448.4 billion in July to US$432.8 billion last month, according to data from the Hong Kong Monetary Authority (HKMA) on Friday, with the US$15.6 billion decline the biggest since the data was first published in 1997.

Total foreign reserve assets of US$432.8 billion represent about seven times the currency in circulation in Hong Kong or 45 per cent of the city’s total money supply, added the HKMA, the city’s de facto central bank.

Analysts said the sharp decline was likely to be a sign of capital outflows from the city along with a drop in exports, although a clearer picture would only be known when a breakdown of the quarterly data, including stock and bond flows as well as for trade and foreign direct investments, is released later in the year. Hong Kong is expected to announce its second quarter balance of payments in mid-September and third quarter figures in mid-December.

“Past experiences suggest portfolio investment is a likely candidate through which outflows occurred,” said Frances Cheung, Asia head of macro strategy at Westpac Banking Corporation. “Negative net merchandise exports should have been another contributor.”