Hong Kong Near to Buying Local Dollars for First Time Since 2005

(Bloomberg) -- The Hong Kong Monetary Authority is on the verge of mopping up local dollars for the first time since a trading band was introduced in May 2005, as the currency slides toward HK$7.85 per greenback. 

The local currency was at HK$7.8491 against the dollar as of 3 p.m. in Hong Kong.

The HKMA’s move would tighten liquidity and raise rates in the city, ending an era of ultra-cheap money that made Hong Kong the least affordable housing market in the world and sent the stock market to a record high. The Hong Kong dollar has been on a downtrend over the past year as ample liquidity prevented local rates from catching up with those in the U.S., prompting traders to borrow the local currency to buy the dollar. 

Under the currency peg, the rates have to eventually converge. That started to happen last year when the HKMA sold additional debt, but the effect was temporary. By shrinking the monetary base, direct purchases of the Hong Kong dollar should exert a much larger upward pressure on rates. That would be a drastic change for Hong Kong, which has never had to defend the weak end of its currency band thanks to strong inflows.

Since the global financial crisis in 2008, about $130 billion to $140 billion of funds have entered Hong Kong, with inflows intensifying over the past few months, Paul Chan, Hong Kong’s financial secretary, told reporters on March 5.

Caught between U.S. easing and steady economic growth in China, Hong Kong saw interbank liquidity swell to records -- in the starkest contrast, 100 times its pre-crisis levels. In the Bank for International Settlements’ measure of the gap between economies’ credit-to-gross domestic product ratios and their long-term trend, Hong Kong came first, indicating unusually rapid debt growth in recent years.

“Actually it’s good for Hong Kong if some hot money leaves, because then the pace of interest-rate normalization would be more ideal,” Hong Kong’s Chan said.

HKMA Chief Executive Norman Chan said on March 8 that the HKMA would step in when the exchange rate reached HK$7.85 and that there was “no need to worry.” He said it wasn’t true that the authority doesn’t want to see a weaker exchange rate, and that it didn’t have any plans to issue extra Exchange Fund Bills. His comments sent the Hong Kong dollar down past HK$7.84 versus the greenback that day, extending its weakest level since 1984.

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