Hong Kong dollar liquidity tightening
Overnight HIBOR hits 16-year high
◎Reporter Fan Zimeng
The recent sharp rise in the Hong Kong dollar interbank offered rate (HIBOR) has attracted attention. Among them, the overnight HIBOR rose 36.8 basis points to 4.80607% on May 11, reaching the highest level since 2007 in one fell swoop and hitting a 16-year high.
Hong Kong dollar “AB” side: the exchange rate weakens and interest rates rise
Hong Kong dollar interest rates continued to rise, reflecting the market demand for Hong Kong dollars is heating up. Analysts believe that this is related to the weakness of the Hong Kong dollar caused by the continuous interest rate hikes by the Federal Reserve, and the Hong Kong Monetary Authority entering the market to buy Hong Kong dollars.
“At present, HIBOR has risen, reflecting the recent tightening of Hong Kong dollar liquidity in the Hong Kong market, which will help stabilize the Hong Kong dollar exchange rate.”China Everbright BankZhou Maohua, a macro researcher of the Financial Market Department, said that the Hong Kong dollar has weakened recently, approaching the weak-side convertibility guarantee, and the Hong Kong Monetary Authority will carry out routine operations to recover Hong Kong dollar liquidity.
Currently, Hong Kong implements a pegged exchange rate system, which keeps the Hong Kong dollar against the U.S. dollar within the range of 7.75 to 7.85. Zhou Maohua said that under the linked exchange rate system, once the Hong Kong dollar hits the weak-side convertibility guarantee against the U.S. dollar, the Hong Kong Monetary Authority will buy Hong Kong dollars, which will lead to a tightening of the Hong Kong dollar base currency and an increase in lending rates to stabilize the Hong Kong dollar exchange rate.
Since March last year, after the Federal Reserve has implemented 10 interest rate hikes with a total of 500 basis points, the Hong Kong dollar has triggered the weak-side convertibility guarantee dozens of times, and the Hong Kong Monetary Authority has repeatedly intervened in the market to maintain the stability of the Hong Kong dollar exchange rate .
Statistics from the Hong Kong Monetary Authority show that in April this year, the Hong Kong dollar triggered the weak-side convertibility guarantee five times in total, and the Hong Kong Monetary Authority’s intervention scale reached HK$27.8 billion; in February this year, the Hong Kong dollar triggered the weak-side convertibility guarantee twice, and the Hong Kong Monetary Authority’s intervention scale was 19 billion Hong Kong dollars. From May to the end of 2022, the Hong Kong dollar has triggered a total of 41 weak-side convertibility guarantees, and the Hong Kong Monetary Authority’s intervention scale has reached 242 billion Hong Kong dollars.
The outflow of funds from the Hong Kong dollar system does not mean their withdrawal from Hong Kong
On the other side of the weak Hong Kong dollar exchange rate and rising Hong Kong dollar interest rates, the aggregate balance of Hong Kong banks has fallen to a low level in more than 14 years.
As of April 2023, the aggregate balance of banks in Hong Kong fell to about HK$49.2 billion, the lowest level since November 2008. At the end of April last year, the figure was HK$337.6 billion.
The significant reduction in the aggregate balance of the Hong Kong banking system has aroused concerns in the market about the “effectiveness of the linked exchange rate system” and “the withdrawal of funds from Hong Kong”.
The low aggregate balance of the banking system does not mean that the liquidity of Hong Kong’s banking system is in crisis. Zhou Hongli, a senior economist at DBS Bank, told a reporter from Shanghai Securities News that the decline in the aggregate balance of Hong Kong banks is the result of the self-adjustment of Hong Kong’s financial system against the background of the Fed’s interest rate hike.
“When the Hong Kong dollar triggers the weak-side convertibility guarantee under the linked exchange rate system, the Hong Kong Monetary Authority will buy Hong Kong dollars and sell U.S. dollars, and the funds will flow out of the Hong Kong dollar system. The aggregate balance of the banking system will decrease accordingly, and the liquidity of the Hong Kong dollar in the market will increase. The interest rate of the Hong Kong dollar will gradually increase.” Zhou Hongli said.
Yu Weiwen, president of the Hong Kong Monetary Authority, said that for a long period of time before the quantitative easing by central banks of many countries in 2008, the aggregate balance of the banking system in Hong Kong, China was at a level of less than HK$10 billion, but the daily operation and settlement of banks have remained smooth. Based on the recent situation, with the decline in the aggregate balance of the banking system, banks can basically manage the liquidity of Hong Kong dollars safely and ensure the orderly and efficient flow of funds.
Talking about the inflow and outflow of funds that the market has been concerned about recently, Yu Weiwen said that since 2008, major central banks around the world have adopted quantitative easing measures in response to the global financial turmoil and the impact of the epidemic, during which the net inflow of funds into the Hong Kong dollar system reached 1 trillion Hong Kong dollars. Therefore, as the United States raises interest rates, global liquidity tightens, and the net outflow of funds from the Hong Kong dollar system “is also a normal phenomenon.”
The tightening of liquidity in Hong Kong’s banking system does not mean that funds are leaving Hong Kong. “In fact, funds flowing out of the Hong Kong dollar system and converted into other currencies (such as the US dollar) may still remain in the Hong Kong financial system.” Yu Weiwen said that from the end of April last year to March this year, although the aggregate balance of Hong Kong banks dropped significantly, the Hong Kong banking system The total amount of deposits remained stable and increased by about 1.4% during the period, which shows that “the outflow of funds from the Hong Kong dollar system does not necessarily mean the withdrawal of funds from Hong Kong.”
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