Photographer: Justin Chin/Bloomberg

Has the Global Scare Over China Eased? Hong Kong Dollar Says Yes

  • After a wild ride this year, pegged-currency is back to normal
  • Libor once again exceeds Hibor as local lending rates fall

Restricted to a tight trading band against the greenback, Hong Kong’s dollar may not be among the most-watched currencies in the world. But it can be a pretty good proxy for gauging investor concerns about China.

The currency earlier this year plunged to its weakest since 2007 as the yuan’s slide fueled speculation that Hong Kong’s monetary policy makers would have to abandon their dollar’s 32-year-old peg. The legal tender’s depreciation in the four weeks ending Jan. 22 was the sharpest such drop since 2003. And then it bounced back almost as fast, with Friday marking the end of its best four weeks since 2008.

Granted, the numbers aren’t spectacular, down 0.6 percent and then up 0.4 percent, as measured by the cross-rate of U.S. cents per Hong Kong dollar. That’s because its pegged range in recent years keeps it between HK$7.75-HK$7.85 per American dollar. Relatively speaking, it was a big deal.

The rebound has brought the currency fairly close to its 10-year average of HK$7.77 per U.S. dollar. It had moved as much as a statistically significant two standard deviations weaker than that mark.

The relative calm has also allowed the cost of borrowing local dollars to fall, as shown by the Hong Kong interbank offered rate. The six-month Hibor for Hong Kong dollars jumped sharply in January and overtook its counterpart London interbank offered rate for borrowing U.S. dollars. Last week, Libor was again on top, as it had been for the previous two months or so.

That said, all is not rosy for Hong Kong, with mainland China still to blame. Moody’s Investors Service last week changed its outlook on Hong Kong to negative from stable.

“Trends in Hong Kong’s credit profile will continue to track those in China, due to its tightening political, economic and financial linkages with the mainland” and “the risks to China’s economic and financial stability,” Moody’s said in a statement.

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