Hong Kong

Despite the temporary capital outflow caused by the US' hiking of interest rates, the Hong Kong Special Administration Region (HKSAR) has vast capability to maintain its Linked Exchange Rate System (LERS) relying on its huge foreign exchange reserve, which exceeds $440 billion, and other advantages, Financial Secretary of HKSAR Paul Chan Mo-po said on Sunday.

A series of interest rate hikes in the US this year have led some investors to sell Hong Kong dollars and buy US dollars so as to earn high returns by holding the greenback. 

As of July 22, the Hong Kong Monetary Authority had intervened in the forex market, undertaking more than HK$170 billion ($21.7 billion) of selling, with the equivalent in US dollars released. The balance of the banking system was reduced to about HK$165 billion correspondingly, Chan wrote in his online blog.

LERS is the cornerstone of Hong Kong's monetary and financial stability, and ensures that the Hong Kong dollar exchange rate remains stable within a band of HK$7.75-7.85 to $1. 

Under the LERS arrangements, the weak-side Convertibility Undertaking was triggered and the automatic rate adjustment mechanism will come into play after capital outflow from the city. Hong Kong dollar's interest rates will gradually rise, offsetting the incentive for trading Hong Kong dollars for other higher yield currencies, Chan explained.

In a literal sense, capital outflow may be a phenomenon of lack of confidence in a market. However, since market players generally only trade currencies with relatively stable exchange rates to earn interest margins, the relevant activities can also be seen as a manifestation of confidence in Hong Kong's LERS, Chan noted.

Hong Kong, an international financial and trade hub, has gone through a series of ups and downs in the past three decades, including the global stock market crash in 1987, the Asian Financial Crisis in 1997-98 and the global financial crisis in 2007-08. With its currency remaining stable in spite of the crises, the public and the market have built up confidence in Hong Kong's LERS.

In addition to the resilient LERS, Hong Kong has maintained a stable and strong fiscal policy, efficient financial risk monitoring mechanism, a powerful buffering and aseismatic ability cultivated in the city's financial and banking system, Chan said.

The financial hub has a huge foreign reserve exceeding $440 billion, which is equivalent to about 1.7 times the monetary base of the Hong Kong dollar. Ample liquidity, stable banking operations and good asset quality are all among the foundations supporting the city's LERS, he added.

Global Times