What is the Hong Kong Dollar Peg and why does it matter? ( News Washington )

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Pegged to the US dollar since 1983, the Hong Kong dollar is generally a dull currency. Except when it’s not, like this year. Since the US Federal Reserve began raising interest rates in March to combat historically high inflation, fund inflows from the Hong Kong dollar market have been intense as investors chased higher yields. As a result, interbank liquidity – Hong Kong’s pool of dollars in the system – is shrinking fast as the city has fought to maintain the peg, drawing market attention and concern over the conflict in the struggling local economy.

The Hong Kong Monetary Authority, de facto the central bank, has a mandate to keep the currency trading at HK$7.75 to HK$7.85 per US dollar. The current band was founded in 2005 and has never broken up. When it gets closer to one or the other, the HKMA intervenes, either by buying or selling city dollars. As the HKMA uses its foreign trade reserves to buy Hong Kong dollars from commercial banks, the aggregate balance of Hong Kong dollars in the banking system — interbank liquidity — goes down accordingly. From May 11 through the November intervention, the HKMA’s balance sheet shrank by more than 70%. It pushes the local liquid loan closer.

2. Why does the nail matter?

First of all, the anchor for financial stability must be considered. A stable currency is important for an open economy like Hong Kong, where trade and logistics are key drivers. Investors park their money in Hong Kong because the currency is relatively safe and easily convertible — one of the reasons the city became an early global financial center. a broken nail would upset the whole equation.

3. What usually moves the Hong Kong dollar?

It is often the case that local loan costs do not eventually move to the US. For example, the gap between the Hong Kong Interbank Offered Rate (Hibor) and its US equivalent (dollar Libor) widened significantly after H began aggressive rate hikes, because liquidity in Hong Kong was still very large. (Hibor and Libor represent the daily average of what banks say they will charge each other to lend.) That gap makes it attractive for traders in Hong Kong to borrow dollars against US dollars to earn higher yields. The so-called bearish trade may push the local currency to its end of HK$7.85, prompting the HKMA to intervene. That plan became less appealing in the latter part of 2022, when the authorities’ purchase of local dollars pushed the three-month Hibor higher than the US equivalent.

4. What are you worried about now?

Less liquidity due to the hedge fund’s increased borrowing this year has led to increased costs and costs for people in Hong Kong, as covid-19 restrictions, particularly on travel, continue to weigh heavily on the economy and employment. In addition, Hong Kong’s property sector is already under pressure from the exodus of Hong Kong residents, either for pandemic or political reasons after Beijing’s 2020 bid for the city. Higher mortgage costs will not help.

5. Should people be concerned about the nail?

Officials in Hong Kong say nothing, but some hedge funds disagree. In November, Bill Ackman, the billionaire founder of hedge fund Pershing Square Capital Management LP, said he would bet against the Hong Kong dollar and peg it with the greenback. Boaz Weinstein, founder of Saba Capital Management, tweeted support for the trade, which he said had a payoff of more than 200-to-one. But the servants dictated that there was no need to change the pin. In July, Financial Secretary Paul Chan said the city’s foreign exchange reserves were “huge” at about $440 billion, equivalent to about 1.7 times the base currency of the Hong Kong dollar — enough to maintain the currency peg. A representative for the HKMA reiterated on November 24 that there is no plan or need to rationalize its foreign-exchange system.

6. Did not the pin press before?

Periods of sustained outflows have occurred before through a series of previous stressors, such as the global financial crisis, the SARS epidemic and US-China tensions under then-President Donald Trump. Chan then noted that China’s central bank could also provide the US dollar through a currency exchange line should Washington impose sanctions on the country. China has the world’s largest foreign exchange reserves of more than $3 trillion. John Greenwood, architect of Hong Kong’s dollar peg and now an independent international monetary consultant at International Monitor, said that because the city has a currency board designed solely to maintain the peg, rather than a central bank that conducts domestic monetary policy, “speculation against the Hong Kong dollar always fails.”

Why not peg the Hong Kong dollar to the Chinese Yuan instead?

There are various factors to support the status quo. The US dollar is fully convertible and can be freely traded in large quantities in foreign exchange markets. The yuan doesn’t fit the bill now. The US dollar also dominates as an international reserve currency, while the yuan still has a ways to go to increase its reserve status. Hong Kong central bank chief Eddie Yue said the peg has worked well for nearly 40 years and there are no plans to change it. However, Hong Kong has been planning for years to adopt currency policies that would facilitate cross-border trade with the mainland. Pegging the local dollar to the yuan “could be a long-term possibility” — if the yuan were used more in Hong Kong and internationally, Goldman Sachs Group economists including Hui Shan and Andrew Tilton wrote in May. Politics may be another driver if Hong Kong loses its semi-autonomous status and integrates into the mainland. George Magnus, an economist and fellow at the University of Oxford’s China Center, said: “It is China’s decision whether it wants to keep the peg in place.”

–With help from Tania Chen.

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