Hong Kong reins back local dollar amid hot money influx ahead of city's blockbuster IPOs, allaying concerns of capital flight

Hong Kong's monetary authority stepped into the financial market twice on Friday to rein back the local currency, which had been pushed over the top end of its trading band against the US dollar by the influx of so-called hot money ahead of several blockbuster initial public offerings on the local stock exchange.

In the second intervention, the city's de facto central bank sold HK$3.88 billion worth of Hong Kong dollars, buying the same amount in the US currency to bring the exchange rate below 7.75000, according to a statement by the Hong Kong Monetary Authority (HKMA). Earlier in the morning it had used nearly HK$1 billion on buying US dollars.

That raised the HKMA's aggregated balance, which shows the liquidity of the Hong Kong banking sector, to HK$99.64 billion (US$12.85 billion).

This marks the eighth intervention this year, as the HKMA spent HK$20.7 billion in the currency market in April alone while global funds poured into Hong Kong to take advantage of the gap between the local cost of money and US interest rate. The practice, known as the carry trade, enables currency traders to profit by parking their funds in Hong Kong.

The continuous inflow of hot money flies in the face of the talk of capital flight from one of Asia's largest financial centres, after US President Donald Trump last week announced that he would strip Hong Kong of its special trading status in retaliation against China's national security law for the city. The plan, devoid of details and timing, nonetheless raised fears among some economists that Hong Kong may lose its competitive edge, causing funds to flee.

Hong Kong stands ready to defend the currency's link to the US dollar with help from mainland China, Financial Secretary Paul Chan Mo-po said in a Friday interview on Bloomberg Television, adding that the city's government has a contingency plan against any US action.

Financial Secretary Paul Chan Mo-po during an interview at the Central Government Offices in Tamar on April 15, 2020. Photo: Nora Tam alt=Financial Secretary Paul Chan Mo-po during an interview at the Central Government Offices in Tamar on April 15, 2020. Photo: Nora Tam

"We don't think we need to do any review on the linked exchange rate system," Chan said. "We stand firm to defend it and the country will back us up in the defence of this linked exchange system."

The People's Bank of China weighed in, with a statement overnight about supporting Hong Kong's role as an international financial centre. HKMA's chief executive Eddie Yue Wai-man was also at pains to allay those concerns.

"Apocalyptic theories always have their audience," Yue wrote in a June 2 blog after Trump announced his revocation plan. "There have not been significant fund outflows from either the HKD or the banking system. On the whole, the local financial market continues to operate in a smooth and orderly manner, reflecting strong market confidence in the linked exchange rate system (LERS), a regime that is clear, transparent and proven to work well."

Hong Kong's government has a HK$4 trillion financial war chest called the Exchange Fund, first set up in 1935 for backing the issuance of bank notes. The city's de facto sovereign wealth fund has ballooned into one of the world's largest currency holdings, comprising US$446.1 billion in reserves as at the end of February.

"The intervention this morning shows that the [National Security law] has not led to capital outflow from the city," said Clement Chan Kam-wing, managing director of accounting firm accounting firm BDO, adding that his firm has received inquiries by US-listed firms to raise capital in Hong Kong. "This will strengthen Hong Kong's IPO market and will continue to attract more capital inflows, which will push the Hong Kong dollar to the strong end of the peg."

HKMA's chief executive Eddie Yue Wai-man on October 2, 2019. Photo: Xiaomei Chen alt=HKMA's chief executive Eddie Yue Wai-man on October 2, 2019. Photo: Xiaomei Chen

The Hong Kong dollar, pegged against the US currency since 1983 at 7.8000, is allowed to trade between 7.7500 and 7.8500 per US dollar. Whenever the local currency exceeds the band in either direction, the HKMA would intervene by selling or buying the local currency against the US dollar to hold the exchange rate within the trading band.

"The money inflow shows that investors have confidence in the Hong Kong market," said Tom Chan Pak-lam, chairman of Hong Kong Institute of Securities Dealers. "While some people may worry about the political tension in Hong Kong, the market shows that as long as there are popular IPOs, the money will flow in. Investors will go to the market where they can make a profit."

SCMP Graphics alt=SCMP Graphics

Mainland China's investment funds and stock traders have been particularly active, making use of the so-called Stock Connect cross-border investment channel to pick up some of the cheapest equity issues among Asia's capital markets. As much as US$35.7 billion of funds had entered Hong Kong this year through the Stock Connect, the highest influx since December 2016, according to Bloomberg's data tracking so-called southbound capital.

Chinese investors are after a handful of large US-listed technology companies that are seeking secondary listings in Hong Kong to hedge against the threat of the US fencing off Wall Street amid escalating US-China tensions. NetEase, the world's second-largest publisher of mobile games, is scheduled to close its pricing today for a US$2.6 billion listing on June 11, while online shopping giant JD.com is due to kick off its offering soon, in preparation for its trading debut in Hong Kong on June 18. The two secondary listings will raise almost US$7 billion between them.

The Chinese legislature's announcement on May 21 of the impending "national security law has sparked panic among some people to exchange their local currency for the US dollar, but the amount was small," said Bruce Yam, currency strategist at Everbright Sun Hung Kai Securities in Hong Kong. "Global and mainland investors are pouring millions of US dollars into the local currency to subscribe to the two giant IPOs due this moth, more than enough to offset any retailer's exchange for the US currency.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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