From April 12 to 19, the Hong Kong Monetary Authority intervened in the foreign-exchange market 13 times as the Hong Kong dollar hit the HK$7.85 per US unit level, buying HK$51.3 billion. This was the first such intervention by the HKMA since establishment of the Weak-side Convertibility Undertaking for HKD at 7.85 in 1998.
Compared with the serious challenge posed to the US dollar peg by the Asian financial crisis between mid-1997 and mid-1998, the capital outflow and weakening of the HKD this time was nothing. Yet, viewed in the context of the sweeping changes in today’s global economic, financial and political landscape, the outflow and weakening is a grim warning that must not be overlooked.
First of all, the outflow and weakening of HKD this time is not simply the result of the widening interest-rate gap caused by United States credit-cost increases.
Since 2005, the interest rate of the HKD has become increasingly influenced by that of the yuan and by the exchange rate between the yuan and US dollar. The Hong Kong banking sector’s refusal to let the city’s interest rates follow rate rises in the US has become a norm. Over the past decade, the widening interest-rate difference between the HKD and USD has not triggered any HKD outflow or weakening against the USD. There are reasons why movements are out of the ordinary this time.
Currently the US is adjusting its global strategies, openly announcing that China and Russia are its opponents. Not only has it waged a trade war on China, but it has also started restricting Chinese enterprises’ investments and operations in the US. It is true that Hong Kong is an independent customs area under “one country, two systems” but, as part of China, it cannot stay out of the worsening Sino-US dispute. In the foreseeable future, Sino-US tension will remain, the SAR’s financial market will be shaken from time to time and HKD will weaken periodically when the US dollar peg is challenged by capital outflows.
Second, the Hong Kong banking sector’s operating environment will become more complicated and difficult.
Some people think outflow and weakening of the HKD will boost and hence “normalize” the city’s interest rates. Frankly speaking, such a view is wrong. Since 2005, other than HKMA’s basic rate — which continuously follows the interest-rate policy of the Federal Open Market Committee under the US Federal Reserve Board of Governors — Hong Kong’s interest rate also depends on two other factors: the Hong Kong dollar and yuan positions of the local banking system. Therefore, whether Hong Kong’s interest rate is normal or not is no longer decided only by whether it is following the US rate.
The yuan position, to some extent, puts Hong Kong interest rates under the influence of yuan credit costs, whereas the HKD position reflects the situation of the local economy. Failing to transform its economy in time, Hong Kong now lacks new industries or occupations. Hong Kong banks are suffering from the problem of having much more deposits than loans and having to vie for property mortgages. Hence Hong Kong banks have to keep their interest rates low.
Before, local banks have adapted to a low and stable interest-rate environment and, though with difficulty, they have learned how to manage. Now, with the global economic, financial and political landscape undergoing transformation on an unprecedented scale and Sino-US tension continuing, Hong Kong banks will suffer from volatility in interbank rates and further difficulties in their operations.
Third, the authorities concerned in Hong Kong should formulate a plan for adjusting the dollar peg at an appropriate time.
This year is the 35th anniversary of the implementation of the dollar peg system. During that time Hong Kong’s external trade relations have undergone a sea change. The Chinese mainland has already replaced the US as the city’s biggest trading partner; Hong Kong’s securities market has been connected with the mainland’s; the SAR has become the world’s largest offshore yuan center while the realization of yuan’s convertibility and becoming a major international reserve currency will not be far away. And from this year onward, Hong Kong becomes a member of the Guangdong-Hong Kong-Macao Greater Bay Area, integrating into the country’s overall development strategy. All these have already required adjustments in the US dollar peg, which will, from now on, face grave challenges from unprecedented transformation in global financial landscape and worsening Sino-US ties. Hong Kong authorities must therefore put the issue of peg adjustment on their agenda.
Last but not the least important, the SAR government should step up efforts to regulate the real-estate market and advance the transformation of Hong Kong’s economy.
The city’s property market bubble is growing every day. When the exchange rate “peg” of Hong Kong dollar to the US unit was heavily affected by panic dumping of Hong Kong dollar assets on April 12-19, forcing local interbank borrowing rates to skyrocket, the real-estate market also reached a new high despite weak local currency.
The Centa-City Leading Index, which indicates second-hand property market trends, hit 179.9 in the week before April 20, an increase of 1.4 percent and new high on record. It also marked an aggregate 9 percent second-hand property price rise since the beginning of the year and almost two-thirds of the 13 percent rise seen last year. If the outward flow of capital continues in the near future and pushes interbank borrowing rates higher, Hong Kong might find itself faced with a hard landing of its real-estate market similar to the one that sent its economy into recession after the Asian financial storm of 1997-98.
(The author is a senior research fellow of China Everbright Holdings)
(Published on Page 8, China Daily Hong Kong Edition, May 2, 2018)