ANALYSIS: Dollar peg critical to Hong Kong

Trump and Chinese president [Photo Credit: CNN]
Trump and Chinese president [Photo Credit: CNN]

China’s national security law for Hong Kong and moves by the United States to begin withdrawing privileges enjoyed by the city under U.S. law have unsettled investors.

They have also raised fears about the stability of the Hong Kong dollar’s (HKD) 36-year old peg to its U.S. counterpart, prompting local officials to issue several reassurances.

The HKD is pegged in a narrow range of 7.75-7.85 to the U.S. dollar.

The Hong Kong Monetary Authority (HKMA) buys and sells the currency at either limit to maintain the range.

Buying HKD boosts it by reducing its availability and raises the costs of betting against the currency.

Sales do the opposite.

The HKMA has sold HK$106 billion ($13.68 billion) so far this year to keep a strengthening Hong Kong dollar within this range, according to Reuters’ calculations.

To maintain the peg, official Hong Kong interest rates track U.S. monetary policy.

The currency’s movement within the band is influenced by differences between market interest rates in both.

Hong Kong interbank rates HIBOR= are higher than their U.S. equivalents LIBOR=, helping keep the HKD strong in spite of concerns about outflows related to the new law.

There are fears that escalating U.S.-China tensions could result in the U.S. potentially limiting Hong Kong banks’ access to U.S. dollars, thus jeopardising the peg.

A Bloomberg report suggested this week that U.S. President Donald Trump’s policy advisers explored that option, though the idea did not gain any traction.

Analysts say the White House cannot hurt the peg in Hong Kong, one of the world’s largest U.S. dollar trading centres, without also hampering the greenback’s hegemony as a global currency.

Some call it a “nuclear option”.

“For the U.S. dollar, exorbitant privilege is not risk-free,’’ Geoff Yu, Senior EMEA Market Strategist at BNY Mellon, said in a note.

Dangote adbanner 728x90_2 (1)

“The bottom line is that current rhetoric surrounding the Hong Kong dollar peg will likely stay as rhetoric.’’

Hong Kong also has more than $400 billion in reserves – six times the currency in circulation.

The HKMA can also call on China’s central bank for U.S. dollars, the city’s top finance official said recently.

Hong Kong’s economy has shrunk in its importance relative to the mainland since the territory’s 1997 handover to China but its financial significance has grown.

Any real threat to the peg risks undermining that.

With China maintaining tight capital controls, Hong Kong acts as a key financing conduit, hosting one of the largest stock markets in the world and acting as the biggest gateway for international investment in mainland stocks and bonds.

It has also become one of the world’s biggest currency trading centres and ranks third globally for U.S. dollar trading.

China’s wealthy have put faith in the city too, with more than half of Hong Kong’s estimated private wealth of more than $1 trillion coming from mainland individuals. ($1 = 7.7501 HKD) (Reuters/NAN)



Advertisement

PT Mag Campaign AD

All rights reserved. This material and any other material on this platform may not be reproduced, published, broadcast, written or distributed in full or in part, without written permission from PREMIUM TIMES.


Support PREMIUM TIMES' journalism of integrity and credibility

Good journalism costs a lot of money. Yet only good journalism can ensure the possibility of a good society, an accountable democracy, and a transparent government.

For continued free access to the best investigative journalism in the country we ask you to consider making a modest support to this noble endeavour.

By contributing to PREMIUM TIMES, you are helping to sustain a journalism of relevance and ensuring it remains free and available to all.

Donate


TEXT AD: To advertise here . Call Willie +2347088095401...



BE THE FIRST TO KNOW! Subscribe to our newsletter

* indicates required

DOWNLOAD THE PREMIUM TIMES MOBILE APP

Now available on

  Premium Times Android mobile applicationPremium Times iOS mobile applicationPremium Times blackberry mobile applicationPremium Times windows mobile application