What Hong Kong’s New Monetary Guardian Has to Worry About
Hong Kong appointed a veteran central banker as next chief of its monetary authority, signaling continuity remains the priority.
(Bloomberg) -- Hong Kong has appointed a veteran central banker as the next chief executive of its monetary authority, signaling continuity remains the priority as the city faces ongoing political turmoil.
While the social unrest over the government’s botched extradition bill won’t be Eddie Yue’s responsibility, and may even have dissipated by the time he takes office in October, maintaining the territory’s reputation for financial stability will be. He will face risks ranging from a resurgent property market to intermittent sniping against the city’s currency peg to the dollar.
“Together with my colleagues at the Hong Kong Monetary Authority, we’ve been through a lot of testing times,” Yue said at a press conference Thursday announcing his new position. “I hope that these valuable experiences will guide me through the challenges that lie ahead.”
Dollar Link
The dollar peg has been the bedrock of Hong Kong’s status as a financial hub, a fact that will bear repeating amid the street demonstrations and violence that has marked the past couple of months. Authorities have intervened to defend it consistently over the years, and have recently pushed back against renewed attacks by Hayman Capital Management founder Kyle Bass.
The Hong Kong dollar’s peg is officially set at 7.80 per dollar, but the currency is allowed to trade 5 cents to either side. The Hong Kong Monetary Authority keeps a reserve pile of around $445 billion to maintain it.
“Hong Kong’s peg to the U.S. dollar has gained attention from time to time over the past 30 years, while the system has been intact through various economic and political events such as the handover, the Asian financial crisis and the global financial crisis,” said Raymond Yeung, chief Greater China economist at Australia & New Zealand Banking Group Ltd. “What the HKMA needs to do is to repeat what they have been doing to reassure confidence toward the peg, which will unlikely be changed.”
Policy Powerlessness
Because its currency is pegged to the dollar, the Asian financial hub effectively imports U.S. monetary policy and adjusts borrowing costs in line with the Fed. That means that if the U.S. is entering an easing cycle or even just holding rates lower, Hong Kong will face the risk that low borrowing costs keep inflating what is already the world’s most expensive property market.
The failure of Hong Kong’s government to keep homes affordable has already fed into social discontent, and may continue to do so for the foreseeable future.
The U.S. Federal Reserve is poised to cut rates on July 31 for the first time since 2008, amid a global slowdown. In Hong Kong, property prices more than doubled in the past decade even after incumbent Norman Chan introduced stringent stress tests on home buyers and less generous mortgages.
The HKMA’s “weakness is that probably they have not been able to stop the housing crisis when the interest rate has been ultra low, no matter what type of control measures are announced,” said Carie Li, an economist at Ocbc Wing Hang Bank.
Fintech Challenge
The new HKMA chief is set to be among the world’s best-paid central bankers, despite having little role in setting interest rates. Other tasks include formulating banking policies and regulating some of the world’s biggest lenders in the Asian financial hub. The authority will be responsible for managing the interests of both traditional banks and a new crop of digital-only banks.
Tencent Holdings Ltd., Ant Financial Services Co., Industrial & Commercial Bank of China Ltd. and Xiaomi Corp. were among companies to win licenses earlier this year to create virtual lenders in Hong Kong. The eight new entrants may in the next five years only reach a combined profit that’s 7% of HSBC Holdings Plc’s Hong Kong net income, according to an analysis by Bloomberg Intelligence. Analysts at Citigroup Inc. estimate around 10% of existing banks’ revenue is at risk over the next decade.
The shakeup in the banking sector may be one of the few areas that Yue can really exert influence.
“It’s a nice job to have,” said Andrew Sullivan, director at Pearl Bridge Partners Ltd. “Because you can’t really make that many mistakes.”
To contact the reporters on this story: Alfred Liu in Hong Kong at aliu226@bloomberg.net;Kari Lindberg in Hong Kong at klindberg13@bloomberg.net
To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, ;Sam Mamudi at smamudi@bloomberg.net, Jeanette Rodrigues
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