No noticeable fund outflows amid protests – HKMA

Exchange Fund sufficient to back currency in case of capital outflows, HKMA says
Hong Kong protests August 2019
Studio Incendo

There has been no noticeable outflow of funds from the Hong Kong dollar and the amount of deposits in the banking system remains stable, as turmoil and protests continue in the city, the Hong Kong Monetary Authority (HKMA) says.

The city’s de facto central bank says it has no plans for monetary stimulus, as Hong Kong’s linked exchange rate system prioritises currency stability and there is no sign of Hong Kong dollar weakness.

“[The Linked Exchange Rate System] has served Hong Kong well through many economic cycles in the past 36 years and has been operating very smoothly even with the massive fund flows in the past,” the HKMA tells Central Banking in an emailed response. “We see no need and have no intention to change the system.”

Meanwhile, Hong Kong financial secretary Paul Chan has announced relief measures to help the economy navigate stronger headwinds and downgraded the growth forecast to 0–1% for 2019. The measures, including fee waivers for small business and subsidies to low-income households, are aimed at alleviating the economic fallout of the US-China trade war, Chan said on August 15.

The financial secretary denied that the fiscal measures were related to recent massive demonstrations against political interference from China. Since June, Hong Kong has been rocked by the protests, which show no sign of dying down. The demonstrations started as protests against an extradition bill and have evolved into movements calling for universal suffrage.

Hong Kong’s benchmark stock index, the Hang Seng Index, has fallen about 9% since the first big protests in early June, while the Hong Kong dollar stayed little changed in its designated trading band of 7.75–7.85 against the US dollar.

The HKMA’s foreign reserve, the Exchange Fund, could help the Hong Kong dollar withstand shocks, the monetary authority says.

“The Linked Exchange Rate System is underpinned by Hong Kong’s massive Exchange Fund – which stands at more than 2.5 times our monetary base – the government’s prudent fiscal management and our robust banking sector,” the HKMA says.

Financial secretary Chan also expressed similar opinions in a briefing in early August.

“The Exchange Fund has over HK$4 trillion [US$510 billion] of assets to defend the peg. The local banks hold HK$1 trillion of Exchange Fund Bills, which can provide ample liquidity to the banking industry,” Chan said.

Authorities are closely monitoring the currency market, said Arthur Yuen, deputy chief executive of the HKMA.

Under the Linked Exchange Rate System, the Hong Kong dollar exchange rate is maintained through an automatic interest rate adjustment mechanism.

In the case of capital outflows, as the market exchange rate moves above 7.85, the HKMA stands ready to buy Hong Kong dollars from banks for US dollars. The purchases of Hong Kong dollars shrink quantity of local currency in the banking system, pushing up local interest rates and increasing demand for local currency.

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