Calling on the reserves

Norman Chan: driving up rates?

During his 16-year tenure as head of thr Hong Kong Monetary Authority (HKMA), Joseph Yam was the staunchest defender of Hong Kong’s currency peg to the US dollar.

In fact, he was often mocked as a “one-trick pony” – as a man who just managed a currency board – despite being the highest paid central banker in the world. Before he retired in 2009, Yam made $1.3 million a year, or seven times the salary of then Federal Reserve chairman Ben Bernanke.

That helps to explain some of the criticism Yam received locally when he published a research paper in 2012 as “a regular citizen” that argued Hong Kong might be better to sever its link to the greenback.

Norman Chan, Yan’s successor, was forced to call a press conference to reassure investors that the peg would stay in place.

Last week Chan found himself at odds with his former boss again, after the publication of an interview in the Hong Kong Economic Journal.

In it, Yam suggested that the territory’s runaway real estate prices might have been less manic if local interest rates had risen in tandem with those in the US since 2015.

In another apparent U-turn from his previous stance as monetary boss, Yam also said the HKMA should consider introducing Chinese-style deposit reserve ratios as a regulatory tool. The HKMA’s PR managers were spurred into action once again, immediately stressing that there was no need to take more proactive action.

Under the peg, the money market rates for the Hong Kong dollar should mirror those of its American counterpart. But since 2015 the gap between the two has widened to nearly 150 basis points. Abundant liquidity in Hong Kong, including capital inflows from Chinese investors into local shares and real estate, has kept a lid on local rates in spite of the rate hikes ordered by the Fed.

But signs of larger capital outflows more recently, possibly including Nasper’s $10 billion divestment of some of its long-held stake in Tencent, has pushed the Hong Kong dollar to a 35-year low against the greenback.

In the summer of 1983 the Hong Kong dollar was pegged to the American dollar at HK$7.8, although the peg was refined in 2005, with the HKMA undertaking to sell the territory’s currency at HK$7.75 and buy it at HK$7.85.

Earlier this month the Hong Kong dollar hit the weak end of the pegged trading band, triggering the HKMA’s first buying intervention since 2005 (it has intervened at the opposite end of the band numerous times).

By this week, the de-facto central bank had taken action a dozen times, mopping up more than HK$51 billion from the local banking system.

The HKMA has plenty of cash in reserve to keep the currency stable. By the end of March, Hong Kong’s foreign exchange reserves stood at $440 billion, the sixth biggest in the world, or 49% of the Hong Kong dollar’s M3 money supply.

That’s why The Economist magazine believes the HKMA has enough ammunition on hand. Yet there are still a few jitters about the local currency’s relative weakness, as well as more questions about whether it would be better pegged to China’s renminbi instead.

For now, however, the HKMA says that the US dollar is still the best choice and that “the conditions are not ripe yet” for a newer peg to the yuan.

Hong Kong lenders are now coming under greater pressure to close the interest rate gap, which might ricochet through the local property market. The Hong Kong Economic Journal suggests that any increase in lending costs won’t have an immediate impact on home prices. However, the newspaper thinks that higher interest rates would still ripple through the local economy, given that many homeowners are on mortgages linked to interbank rates, meaning that disposable incomes will fall if interest rates rise, hitting local consumption.

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