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Hong Kong Buys $2.07 Billion in Week to Defend Currency Peg

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Aug. 1 (Bloomberg) -- Hong Kong’s de facto central bank bought $2.07 billion this week to stop the local currency from strengthening beyond its 31-year-old peg to the greenback.

Share listings, dividends and mergers and acquisitions are driving demand, the Hong Kong Monetary Authority said July 26. OAO MegaFon, Russia’s second-largest wireless operator, has shifted some of its cash holdings into the city’s dollar as the U.S. and Europe ratchet up sanctions, Chief Financial Officer Gevork Vermishyan said in an interview yesterday.

Hong Kong’s Hang Seng Index of shares rallied 6.8 percent in July, the biggest monthly gain since September 2012, while the world’s second-largest exchange-traded fund investing in Chinese stocks said demand is so strong that it is close to exhausting its domestic investment quota. Data today showed China’s manufacturing expanded at the fastest pace in more than two years in July.

“Besides technical reasons due to commercial activities, the Hong Kong dollar has been strong as inflows are coming for China-related assets,” said Ho Man Chun, a strategist at Bank of Communications Co.’s Hong Kong branch. “The Hong Kong dollar is likely to stay strong as China’s economic recovery continues.”

The currency was linked to the U.S. dollar in 1983 when negotiations between China and the U.K. over the city’s return to Chinese rule spurred capital outflows. It was kept at HK$7.8 per dollar until 2005, when policy makers committed to limiting declines to HK$7.85 and capping gains at HK$7.75. The Hong Kong dollar traded at HK$7.7500 as of 11:15 a.m. local time.

Citic, OCBC

The HKMA bought the greenback on July 1 for the first time since December 2012, and injected a total $8.394 billion last month. Demand for the Hong Kong dollar comes from commercial activities with June-September being the peak season for dividend distribution, HKMA Deputy Chief Executive Peter Pang wrote in a July 26 article on the authority’s website. This year’s dividend payouts will be as much as HK$200 billion ($25.8 billion), he said.

Citic Pacific Ltd.’s HK$53 billion share issuance for the acquisition of its parent’s assets and Oversea-Chinese Banking Corp.’s purchase of Wing Hang Bank Ltd., which involved about HK$40 billion, were also drivers, Pang wrote. OCBC will delist Wing Hang after increasing its ownership to 97.52 percent, the lenders said in statements to the Shanghai and Hong Kong exchanges on July 29.

Moscow-based Norilsk Nickel, the world’s largest producer of nickel and palladium, is also keeping some of its cash in Hong Kong dollars now, said two people with knowledge of the matter who asked not to be identified as the information isn’t public.

Fed Stimulus

Hong Kong’s currency peg means the city must follow the U.S. policy on interest rates, which have been kept near zero since December 2008. The Federal Reserve this week reduced its monthly bond purchases to $25 billion amid signs the U.S. economy is strengthening.

The Hong Kong dollar’s overnight interbank rate was at 0.05214 percent today, down from 0.19857 percent on June 30, according to fixings provided by the Hong Kong Association of Banks. The rate for 12 months was 0.85046 percent.

A CSOP Asset Management Ltd. exchange-traded fund, which invests in Chinese stocks, recorded an all-time high inflow of HK$8.48 billion in July with its unit price rising 12.9 percent to HK$9.65. Investors are also keen to buy China stocks because of a planned Hong Kong-Shanghai bourse link, Jack Wang, CSOP’s Hong Kong-based managing director, said in a July 30 interview.

The shift in market expectations over the timing and pace of U.S. interest-rate increases may affect fund flows to emerging markets including Hong Kong, the HKMA said in a statement to Bloomberg News yesterday. “In light of the gradual normalization of the U.S. monetary conditions, banks, enterprises and individuals should manage their liquidity and interest rate risks prudently, and avoid excessive borrowing,” it said.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Robin Ganguly, Amit Prakash

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