Hong Kong’s Resilient Markets Just Knocked Down Another Big Test
Hong Kong five-hundred, one-hundred and twenty-dollar banknotes in Hong Kong, China. (Photographer: Paul Yeung/Bloomberg)

Hong Kong’s Resilient Markets Just Knocked Down Another Big Test

If Hong Kong’s markets are any guide to its future as an international financial center, then the city’s investors have little to worry about.

That’s one way to read Wednesday’s strength in Hong Kong stocks and the local dollar even after the city’s currency peg became the latest battlefront for Beijing and Washington. There was little reaction in financial markets despite the escalating threat from the Trump administration: The Hong Kong dollar traded at the strong end of its band against the greenback and the Hang Seng Index closed 0.6% higher.

Some Trump aides are considering ways to undermine the peg mechanism in retaliation for China’s recent moves to erode political freedoms in the former British colony, according to people familiar with the matter. The plan has yet to gain serious traction, the people said. The head of Hong Kong’s de-facto central bank has previously said such an “apocalyptic” move could backfire by destabilizing global markets and undermining the attractiveness of U.S. dollar assets.

Hong Kong’s Resilient Markets Just Knocked Down Another Big Test

Yet currency pegs have a history of breaking, even if Hong Kong’s has endured mostly unscathed for almost 40 years, and just the idea that its future could be in peril risks sparking a shift out of Hong Kong dollars into other currencies. Short sellers, who have dabbled in bets against the peg for decades, could also be emboldened.

Doubt over the peg’s future would be a serious concern to Beijing officials, who have sought to shore up the city’s financial markets since the security legislation was first announced to worldwide shock in late May. Mainland capital has flooded into Hong Kong equities since then, with about $8.7 billion pouring in via stock exchange links in Shanghai and Shenzhen. A wave of share sales by Chinese firms has added support.

The result has been successful. The Hang Seng Index has roared back into a bull market, after suffering its biggest monthly loss in May versus an index of global equities in more than two decades. The local dollar has been in such demand that the Hong Kong Monetary Authority has sold HK$86.61 billion ($11.2 billion) to keep it from strengthening beyond its trading band since April, including HK$11.47 billion on Wednesday.

Such gains have been emphasized by local officials, as other countries step up efforts to help Hong Kong citizens seek sanctuary. Hong Kong Chief Executive Carrie Lam said Tuesday that the city’s financial markets have responded positively to the national security law. That’s at least the second time since May that Lam publicly attributed rising stock prices to the legislation, pointing to improving business confidence.

There’s little sign of the city’s financial markets being upended again soon. The cost of protection against losses in the Hang Seng Index is the lowest in more than two years, according to one-month options. Hong Kong’s version of the VIX slipped on Wednesday, showing waning demand to hedge stocks.

The local dollar’s 12-month forward points -- instruments used to hedge against depreciation in the currency -- rose just 23 points on Wednesday to about 214. They remain well below their peak of 768 points in May, which was the highest level since 1999.

But uncertainty over the main pillars of Hong Kong’s success will continue to threaten the city’s status as a global financial hub for the foreseeable future. The security law, which China described as a “sword of Damocles,” is sowing confusion over what is permitted in the new era, and prompting a rethink by tech and financial firms alike about their roles in the city.

With easier avenues to emigration opening up for the city’s roughly 7.5 million people, and the domestic economy in tatters, shifting assets out of Hong Kong dollars risks becoming a bigger trend. That concern is showing in shares of HSBC Holdings Plc, which lost as much as 4.3% in Hong Kong on Wednesday.

The HKMA said it had nothing to add beyond past statements on the subject. A Hong Kong-based spokeswoman for HSBC also declined to comment.

With the currency peg now a potential target of the Trump administration, even if the U.S. doesn’t carry out such an extreme step, ensuring the stability of the financial system will likely be as important to Beijing as cracking down on dissent.

©2020 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.