Exclusive | Decouple Hong Kong’s currency peg to the US dollar? ‘Absolutely not,’ says finance chief Paul Chan
- Peg is aligned with national strategy and fortifies city’s standing as international financial centre, Chan tells Post in exclusive interview
- New administration is in discussions with Beijing on allowing Chinese companies to share data with Hong Kong if they join local bourse, he says
Hong Kong will “absolutely not” decouple its currency from the US dollar despite recent capital outflows and challenging China-United States ties, as the peg is aligned with the national strategy and fortifies the city’s standing as an international financial centre, the city’s finance chief has told the Post.
The new administration was also discussing with Beijing on allowing Chinese companies to share sensitive data with Hong Kong if they joined the local bourse, Financial Secretary Paul Chan Mo-po said in the exclusive interview.
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The move, along with other international organisations doing the same, would help turn Hong Kong into a world-class data centre while boosting market capitalisation at the same time, he argued.
“If we are able to convince the mainland authorities to allow data to cross the border to be used in Hong Kong, with the assurance that the data will stay here and will not go overseas, then it will put Hong Kong in a very advantageous position,” he said.
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The possibility of another rise in US interest rates this week, combined with recent capital flight and escalating tensions between Washington and Beijing have fuelled concerns over the ability of Hong Kong to withstand the pressures on the currency peg.
“This is working within our design [of the currency peg]. There’s no cause for alarm, we have ample liquidity,” Chan said, in reference to recent, frequent moves by the Hong Kong Monetary Authority (HKMA) to defend the currency peg.
Asked whether the authority would review the long-standing peg to the greenback, he said: “No. Absolutely not. The outflow of capital is mainly because of carry trades.”
A carry trade is an investment strategy that involves borrowing one currency at a lower interest rate to buy another currency that provides a higher rate of return. Investors then collect higher interest rates on the currency they bought.
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The Hong Kong dollar is pegged at a range of HK$7.75 to HK$7.85 to US$1. The authority buys or sells the currency at either limit to maintain the range.
The HKMA first intervened in the dollar peg this year on May 11, and it again intervened in the foreign-exchange market twice within 24 hours on July 14 to defend the system as the market braced for further capital flight ahead of the potential US rate rise.
As of July 22, the authority had undertaken more than HK$170 billion in sell orders, with the banking system balance falling to about HK$165 billion.
“One fundamental premise for carry trade to succeed is that they have to have confidence in our currency peg. Otherwise they run very high risk,” Chan said, adding the outflow of money so far was only a “very small portion”.
The financial secretary urged the public to look at both the aggregate balance, which represents the level of interbank liquidity, and the Exchange Fund Bills and Notes (EFBNs) when assessing the strength of the city’s monetary base.
EFBNs are Hong Kong dollar debt securities issued by the HKMA, and Chan said the programme was set up to absorb excess liquidity in the banking system.
During the last significant outflow of capital in 2008, the value of EFBNs was only HK$158 billion by the end of that year. But at the end of this June, the figure stood at HK$1.19 trillion, he said.
Foreign exchange reserves stood at about US$450 billion, or 1.7 times the monetary base, he noted, while the liquidity of the banking system was 158 per cent, higher than the 100 per cent global requirement.
Chan also pointed out he chaired a committee tasked with coordinating efforts of financial system regulators to ensure there were no gaps in oversight, part of a monitoring system set up in the past two years to identify any irregularities in both the currency and stock markets.
On the prevailing geopolitical risks and lingering questions about whether Hong Kong should have a central bank with powers beyond the HKMA to enhance its financial security, Chan said both issues had to be viewed from a broader perspective.
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“If I approach this from the level of say, for example, national strategy, in the face of the challenging Sino-US relationship, no matter [if it] is trade war or thereafter the various tensions, the strategy adopted by our country is not to decouple,” he said.
“I think in the case of Hong Kong, this is also important because we are an [international financial centre], an open economy. So we welcome business from all over the world to come here to do business to succeed together with us.”
Chan also noted the market share of mainland-related financial institutions in the city had also increased and now accounted for about one-third of total banking assets.
“They are also significant players,” he said. “We believe, through the competition, we maintain a level playing field and then let the banks excel.”
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Chan did not rule out drafting legislation to enhance data security, if the mainland allowed Hong Kong to handle sensitive data from Chinese companies, including those delisted from the US market.
“We are in the course of discussion and formulating our strategy … we will work out whether there is a need to legislate, and I won’t draw a conclusion at this stage,” he said.
“But in the process, in order to achieve the goal of having cross-border data to be used here, we need to put in sufficient safeguards and assurances to ensure the authorities feel comfortable to allow those data to come over.”
Tomorrow: In part 2 of the interview, Paul Chan discusses housing and interest rates
