Hong Kong Dollar Peg Intervention Swells to Biggest Since 2009

  • HKMA buys $11 billion in October as Hang Seng Index surges
  • A Fed rate increase would force Hong Kong to follow suit

The Hong Kong Monetary Authority bought the most U.S. dollars in six years this month to keep its currency within the permitted trading band amid inflows into its stock market and signs the city will be forced to raise interest rates.

The de facto central bank purchased almost $11 billion in October at HK$7.75 a dollar, the strong-end of the permitted range, according to data compiled by Bloomberg. That took the aggregate balance of Hong Kong’s banking system to HK$418 billion ($54 billion) on Oct. 29, the highest in data going back to 1997. The benchmark Hang Seng Index rose 8.6 percent in October, the first gain since April, as China’s central bank cut interest rates for the sixth time in less than a year and the Communist Party met in Beijing to work on its next five-year plan.

"Investors have been betting the Chinese government would come up with policies to bolster economic growth and hence we are seeing some inflows," said Stella Lee, president of Success Wealth Management Ltd. in Hong Kong. "We aren’t seeing any threats to the Hong Kong dollar peg. It’s more to do with stocks positioning this time."

China plans to abandon its one-child policy and allow couples to have two children, the Xinhua News Agency reported Thursday. The nation needs average annual economic growth of at least 6.53 percent over the next five years to meet the government’s goal of establishing a “moderately prosperous society,” Premier Li Keqiang said in a speech last week to Communist Party members, according to people familiar with the matter. 

Interest Rates

Under the linked exchange-rate system, Hong Kong has to follow U.S. interest rate increases, as the Federal Reserve this week indicated might happen before the end of the year. That would put appreciation pressure on the city’s currency, while other regional exchange rates would probably weaken.

Hong Kong linked its currency to the greenback in 1983, when negotiations between the U.K. and Beijing over the city’s return to Chinese rule spurred an exodus of capital. In 2005, policy makers committed to limiting the currency’s decline to HK$7.85 per dollar and capping gains at HK$7.75.

This round of HKMA intervention started from Sept. 1 after a surprise yuan devaluation in August sparked some conversions from the Chinese currency into the Hong Kong dollar. The People’s Bank of China has been intervening in both onshore and offshore markets in the past few weeks to support the yuan and top leaders have reiterated that there’s no basis for further depreciation.

The yuan in Hong Kong has climbed 0.4 percent this month, after gaining 1.4 percent in September in the biggest advance since 2011. The Hong Kong dollar traded at HK$7.75 versus the greenback as of 5:52 p.m. local time. The city’s yuan deposits dropped by a record 84 billion yuan ($13 billion) in September from the previous month, according to HKMA data on Friday.

"The demand for the Hong Kong dollar stemming from the unwinding of yuan positions has eased as the Chinese authorities acted to stabilize the exchange rate," said Success Wealth’s Lee. "We could still see some more inflows into Hong Kong as investors get ready to buy stocks."

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