Hong Kong Intervenes for Peg for Fifth Time in Two Weeks

The Hong Kong Monetary Authority sold its own currency for the fifth time in less than two weeks to preserve a 29-year-old peg to the U.S. dollar.

The central bank added HK$2.71 billion ($350 million) to the banking system in Hong Kong yesterday as the currency reached the upper limit of its trading band, according to a spokeswoman for the HKMA, who declined to be identified because of her organization’s policy. That followed a $603 million intervention on Oct. 19, the first time since 2009, and a combined $1.25 billion on Oct. 23.

Funds are flowing into Hong Kong after the U.S., Europe and Japan introduced policies to stimulate their economies and data signal China’s growth slowdown is abating. Last month, the Federal Reserve unveiled a third round of quantitative easing and Europe announced bond-buying plans, spurring capital inflows into emerging markets. The Bank of Japan expanded its asset-purchase program for the second time in two months yesterday.

The HKMA said it expects net inflows into the currency will continue “for a period of time,” according to an e-mailed statement yesterday. “We will remain closely vigilant of the situation and to maintain the exchange rate stability in accordance with the currency board mechanism,” it said.

The Hong Kong dollar was steady at HK$7.7501 versus the greenback as of 10:43 a.m. Hong Kong time today, according to data compiled by Bloomberg. Two-year forwards strengthened 0.03 percent to HK$7.7397, having a week ago touched this year’s high of 7.7343.

Currency Board

When the Hong Kong dollar reaches the so-called strong end of the permitted trading range, the HKMA offers to buy U.S. dollars to prevent further appreciation under its currency board system. The latest intervention will raise the banking system’s aggregate balance to HK$165.7 billion on Nov. 1, according to HKMA data.

Hong Kong fixed the currency in 1983, and in 2005 committed to keep the exchange rate between HK$7.75 and HK$7.85. The city had $301.2 billion of foreign-exchange reserves as of the end of September, amounting to about eight times the currency in circulation. The holdings grew 8.5 percent in the past year.

Capital inflows into Hong Kong signal the Chinese economy is bottoming, Credit Suisse Group AG said in a report last week. Industrial production in September rose at a better-than-estimated 9.2 percent from a year earlier, retail sales climbed 14.2 percent, the most since March, and fixed-asset investment excluding rural households for the first nine months of the year increased 20.5 percent. The yuan has gained 1.9 percent against the greenback since the end of July.

China’s Economy

A report tomorrow may show China’s manufacturing ended a two-month contraction in October. The official Purchasing Managers’ Index will be at 50.2, with a reading above 50 indicating an expansion, according to the median estimate in a Bloomberg survey of economists.

The linked exchange rate system has given Hong Kong companies stability in commercial contracts while tethering monetary policy to that of the U.S., where borrowing costs are being held down to spur jobs and housing markets. Hong Kong’s jobless rate is near a four-year low and home prices are at all-time highs.

Hong Kong Chief Executive Leung Chun-ying imposed a tax on overseas homebuyers last week to deter capital inflows and reduce the risk of a bubble in the world’s most expensive housing market. That’s the third set of property curbs in two months, after tightening mortgage requirements and boosting the supply of land for developers.

“Even if asset price pressures do start to rise, we believe that authorities have plenty of other tools to use, as indicated by recent measures to tighten the property market” HSBC Holdings Plc. analysts led by Paul Mackel wrote in a note today. “We continue to expect the HKMA to maintain its integrity of the Hong Kong dollar peg and do all it needs to in order to keep the system intact.”

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