HongKong

 
The Hong Kong Special Administrative Region (HKSAR) government is stepping up purchases of its local dollar to defend the city's currency peg as it faces potential capital outflows due to a widening interest-rate gap with the US.

Experts said Hong Kong’s sufficient aggregate balance and firm support from the central government will crush any ill-intentioned attempt to short the local currency.

The Hong Kong Monetary Authority (HKMA) bought HK$11.2 billion ($1.43 billion) on Wednesday, the Hong Kong Economic Times reported. This marked the 13th intervention by the HKMA to buy Hong Kong dollars since May 13, pushing the total amount to HK$95.7 billion. 

The aggregate balance in Hong Kong's banking system will fall to HK$241.78 billion as of Friday.

The move comes as aggressive US rate hikes have caused a widening interest-rate gap between the US dollar and the local currency, causing downward pressure on the Hong Kong dollar.

HKMA Chief Executive Eddie Yue said last Thursday that the US Fed’s interest rate hike of 75 basis points was in line with market expectations, and Hong Kong's monetary and financial markets and foreign exchange market had remained smooth and stable amid repeated interest rate hikes in the US.

Yue noted that US rate hikes this year have caused a widening gap between the US dollar and Hong Kong dollar, but he is not worried about large outflows, saying that under the pegged exchange rate regime, outflows of funds from the Hong Kong dollar system due to rising US interest rates are within expectations.

Yu said the HKMA would closely monitor market conditions and strive to maintain the monetary and financial stability of Hong Kong.

Hong Kong Finance Secretary Paul Chan Mo-po noted last Thursday that he believed that rapid US interest rate hikes and shrinking of the Fed's balance sheet will continue, putting pressure on the US and global economies. 

“However, the aggregate balance in Hong Kong is quite abundant,” Paul said.

The HKSAR should have the capacity to defend the stability of the peg as its foreign reserves are still high, Dong Dengxin, director of the Finance and Securities Institute of the Wuhan University of Science and Technology, told the Global Times on Wednesday.

“All the HKSAR has to do is maintain the stability of the capital market with its routine operations,” Dong said.

Moreover, the HKSAR will be firmly backed by the central government, which has over $3 trillion in foreign reserves, which will make it capable of defeating any speculative attacks on the currency peg or traders who short the Hong Kong currency, experts said.

“If the HKMA runs out of dollars, the central government has more than $3 trillion in foreign exchange reserves and it will be a strong backer of Hong Kong's financial stability,” Liang Haiming, dean of the Belt and Road Institute at Hainan University, told the Global Times on Wednesday.

Hong Kong’s currency was pegged to the greenback in 1983. The current trading band of 7.75-7.85 versus the US dollar, set in 2005, has never been broken.