Hong Kong central bank pours cash to stabilize pegged currency, higher mortgage rates ensue

On Aug. 5, Hong Kong’s central bank bought the largest amount of its currency in one day since May 12 — HK$14.161 billion (about $1.80 billion) — to keep it from weakening. further and break its peg to the US dollar.

On July 28, after the US Federal Reserve announced a 75 basis point rate hike, the Hong Kong Monetary Authority (HKMA), the city’s central bank, followed suit and raised its base rate. from 75 basis points to 2.75%.

Since October 17, 1983, Hong Kong has adopted the Linked Exchange Rate System (LERS), allowing the HKMA to stabilize exchange rates from the US dollar to the HKD between 7.75 and 7.85, also known as convertibility commitment (CU). As a currency pegged to USD, the CU on the strong side of the HKD is 7.75 per US dollar and the CU on the weak side is 7.85.

To cope with aggressive US dollar rate hikes since May and weak market demand for the HKD, the HKMA was asked to buy more than HK$201.6 billion (approximately $26.2 billion ) to note-issuing banks in order to stabilize the HKD exchange rate.

“As the U.S. raised interest rates and interest rate differentials between the Hong Kong dollar and the U.S. dollar widened, market participants naturally saw incentives to carry trade HKMA chief executive Eddie Yue said on July 28. [the] weak local demand for Hong Kong dollars in recent months, the weak side convertibility commitment has been triggered several times since May.

Since March, the Fed has raised the federal funds target range four times for a total of 225 basis points. As of August 5, the HKMA made 29 moves to buy HKD and sell USD according to the LERS, which cost a significant amount of foreign currency to help the local.

Despite the seemingly unsustainable costs of stabilizing the HKD, Hong Kong Financial Secretary Paul Chan told the South China Morning Post (SCMP) on July 28 that the HKD would never decouple from the USD.

In response to Chan’s comment, Albert Song, a news commentator and expert on China’s financial system, told The Epoch Times, “The Fed may stop raising interest rates in September. And the Hong Kong government intends to [defend the currency peg] until then. Less fluctuating exchange rates will also reduce pressure on Hong Kong’s financial system. »

“However, this is a financial war that may lead to the depletion of currency reserves, as the HKMA has to keep selling dollars and buying HKD to stabilize the exchange rate,” Song added.

On August 5, the overall closing balance (AB) fell to HK$129.293 billion (approximately $16.8 billion). By comparison, the AB on July 22 was HK$165.259 billion (about $21.1 billion).

“Aggregate balance refers to the sum of the balances of clearing accounts maintained by banks with the Hong Kong Monetary Authority (HKMA), representing interbank liquidity”, as defined by BNP Paribas, a commercial banking group based in France. AB is directly linked to the exchange rate of HKD to USD.

When the market demand for the HKD decreases and the HKD exchange rate slides towards the weak side of the CU (7.85 HKD per USD), in this case the HKMA – at the request of the banks – commits to sell USD and buy HKD from banks. Therefore, the AB will fall and the HKD interbank rates will rise, thereby stabilizing the HKD exchange rate within the CU.

Currently, the market demand for the HKD is weak and the HKD exchange rate persists around the weak side of the CU band, which means that funds will continue to flow out of the HKD system and the HKMA will have to maintain the pace of purchase. HKD to defend the currency peg.

Rising mortgage rates

Following the Fed’s interest rate hikes, HKD interbank rates will continue to rise and gradually follow USD interbank rates. Banks should adjust interest rates on deposits and loans based on their funding cost structures and other relevant considerations.

HKMA Chief Executive Eddie Yue said on July 28 that “the public should carefully assess and manage relevant risks when buying property, taking out a mortgage or making any other investment decisions. ‘loan’.

Meanwhile, the executive director and CEO of Hong Kong Mortgage Corporation Limited, Raymond Li, recommended a fixed-rate mortgage program to the public, according to HKMA.

“In recent months, market participants have closely followed global developments, particularly the pace of U.S. interest rate hikes…While long-term interest rate risk is a major concern for them, one option to consider is the fixed rate mortgage plan,” says Li’s article.

During a Q&A with the press on July 28, City Finance Secretary Paul Chan said the Fed’s continued interest rate hikes are not conducive to economic recovery, adding that “the external economic situation will continue to deteriorate”. [and] Hong Kong’s export performance will naturally be affected.

“As for the impact of [an] rising interest rates in the real estate market, when [the] interest rates go up, homeowners mortgage repayment will go up,” Chan added.

At the end of July, Hong Kong’s foreign exchange reserves, including unsettled foreign exchange contracts, stood at $440.1 billion, a significant drop from $492.5 billion at the end of January.