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Hong Kong Dollar Inflows Surge, Staring Down Capital Flight

Hong Kong Dollar Sees Inflow Surge, Staring Down Capital Flight

(Bloomberg) -- For all the debate of the future of Hong Kong, investors for now anyway are clamoring for the city’s currency.

The pegged Hong Kong dollar climbed to the strong end of its permitted trading band late Thursday U.S. time, prompting intervention by the de facto central bank. Another round occurred Friday during Asian trade. While concern about looming national-security legislation has spurred speculation about capital outflows, demand for the local currency has risen as investors seek a slice of highly sought share sales in Hong Kong by Chinese tech firms.

The schism underscores the discordant views on how Hong Kong will fare amid rising U.S.-China tensions. Beijing is keen to sustain the former British colony’s role as global financial center, mainland capital has flooded into the local stock market and Chinese firms have lined up to list there. Meanwhile, some locals are hedging against an uncertain political future by amassing foreign exchange and looking at avenues for emigration.

Hong Kong Dollar Inflows Surge, Staring Down Capital Flight

The Hong Kong Monetary Authority sold HK$4.85 billion ($626 million) of the city’s currency on Friday, according to its page on Bloomberg. That was its first intervention since April 27. The aggregate balance, a measure of interbank liquidity, will increase to almost HK$100 billion from Tuesday, the highest since August 2018.

Mainland money keeps flowing into Hong Kong’s stock market through exchange links with Shanghai and Shenzhen. Eligible investors, which can include brokers and insurers or individuals with at least 500,000 yuan ($70,000) in their trading accounts, purchased another HK$775 million on average each day this week. They had already been net buyers of Hong Kong stocks for 35 consecutive weeks.

Plans from some of China’s biggest companies to sell shares in Hong Kong are increasing the demand for cash, helping boost the local dollar. NetEase this week raised about $2.7 billion in Hong Kong, with local media saying the the retail portion was more than 130 times oversubscribed. Online retailer JD.com Inc. started taking orders for its shares on Friday, and Yum China Holdings Inc. has also hired banks for a listing this year.

As mainland money pours in, officials in Beijing have touted their commitment to maintaining Hong Kong’s standing as an international financial center. In a statement backing China’s national security law plans for the city, China’s central bank said it will work to ensure “Hong Kong’s economic and financial stability and prosperity.” China’s banking and securities regulator added that it hadn’t seen any abnormal outflows from the city.

Hong Kong’s government is also promoting a message of stability, in particular for its currency peg -- which has been unbroken since the 1980s. Financial Secretary Paul Chan said Friday there was no need to review the peg system.

For international investors, much still depends on details of China’s new security law and how it affects Hong Kong’s judiciary. Exactly how the U.S. chooses to respond is also hanging in the balance: the Trump administration has the power to limit the Hong Kong Monetary Authority’s access to U.S. dollars, which could undermine the city’s ability to have a peg at all. (HKMA chief Eddie Yue, though, dismissed that possibility this week.)

For now, relief is showing in the foreign-exchange market after the U.S. refrained from taking immediate punitive measures against Hong Kong. The local dollar’s 12-month forward points -- a measure of bearish bets -- are reversing from the highest level since 1999.

A rally in stocks is also helping boost sentiment, with the Hang Seng Index logging its best week since April 2015. HSBC Holdings Plc and Standard Chartered Plc -- the two British institutions that dominate Hong Kong’s banking system and have endorsed China’s proposed security law -- jumped at least 13% this week in Hong Kong.

©2020 Bloomberg L.P.