Hong Kong Defends Currency Peg for First Time Since 2012

Hong Kong’s de facto central bank stepped in for the first time since December 2012 to prevent the city’s currency from rising against the U.S. dollar.

The Hong Kong Monetary Authority said it bought $2.1 billion within the past 24 hours at HK$7.75 a dollar, the upper limit of a convertibility range that triggers intervention. The purchases, disclosed on the authority’s Bloomberg page, were confirmed by phone.

“Demand for the Hong Kong dollar increased lately,” the monetary authority known as HKMA said yesterday in a press release. That was partly driven by “commercial activities, including merger and acquisition activities and dividend distribution,” it said.

Hong Kong’s almost 31-year-old peg is coming under pressure as signs of a pickup in the U.S. and Chinese economies, the world’s largest, bolster demand for shares listed in the city. China’s manufacturing expanded in June at the fastest pace in six months, a government report indicated yesterday, and the Hang Seng Index of shares was set for the highest close this year.

“Clearly, an improved outlook for China and emerging markets in general is leading to inflows that are pressuring the Hong Kong dollar upwards,” said Win Thin, a currency strategist at Brown Brothers Harriman & Co. in New York. “I remain constructive on emerging markets for the next couple of quarters, so the HKMA will likely have to continue intervening.”

Won, Peso

The Hong Kong dollar was little changed at HK$7.7503 per dollar as of 2:27 p.m. local time, after touching HK$7.75 earlier today, according to data compiled by Bloomberg. The Hang Seng Index rose 1.2 percent, after a government report yesterday showed China’s Purchasing Managers’ Index was 51 for June, the highest this year. That compared with a median estimate of 51 in a Bloomberg News survey and a reading of 50.8 in May.

The Bloomberg JPMorgan Asia Dollar Index climbed 0.8 percent in the second quarter, the best performance since the last three months of 2012. South Korea’s won led regional gains with a 5.2 percent advance, followed by a 2.7 percent strengthening of the Philippine peso, data compiled by Bloomberg showed. Global funds bought a net $20.4 billion of stocks in India, Indonesia, South Korea and Taiwan in the second quarter, according to data compiled by Bloomberg.

Currency Board

Hong Kong pegged its currency 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. In 2005, policy makers committed to limiting the currency’s decline to HK$7.85 per dollar and capping gains at HK$7.75.

When the Hong Kong dollar reaches the so-called strong end of the trading range, the HKMA offers to buy U.S. dollars to prevent further appreciation under its currency board system. The monetary authority injected a total $13.8 billion into the financial system in 2012 to prevent the local currency from strengthening beyond its permitted trading range, data compiled by Bloomberg show. Hong Kong Financial Secretary John Tsang said in October there were no plans to change the linked exchange-rate system.

The peg has served Hong Kong’s economy well and rising political instability in the city won’t jeopardize the HKMA’s ability to defend it, Raymond Yeung and Louis Lam, Hong Kong-based economists at Australia & New Zealand Banking Group Ltd., wrote in a note today. The HKMA injections were not linked to a pro-democracy march in the city yesterday, the analysts said.

Hundreds of police cleared protesters from Hong Kong’s business district today after the annual march, which was held to oppose Chinese control of elections and attracted the most people in a decade, turned into an overnight sit-in. Police said they arrested 511 people for illegal gathering and obstructing traffic at Chater Road, which was cleared by 9 a.m.

“We will monitor the market developments closely and maintain the stability of the Hong Kong dollar in accordance with the currency board arrangements,” the HKMA said yesterday.

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