Hong Kong immigration focus on Hong Kong immigration and business: News from Beijing on the 3rd, the Hong Kong Monetary Authority (HKMA) intervened in the market again on Wednesday to maintain the Hong Kong dollar's linked exchange rate, sparking concerns about whether Hong Kong can maintain its peg to the US dollar. However, institutions such as UBS believe the possibility of abandoning it is very small.
On Tuesday, the HKMA bought 15.5 billion Hong Kong dollars worth of US dollars, its first intervention since April. On Wednesday, it injected another 12.5 billion Hong Kong dollars into the financial system.
Under the current exchange rate system, the Hong Kong dollar is pegged to the US dollar at a rate of 7.8 HKD to 1 USD, but it is allowed to fluctuate between 7.75 and 7.85. Once the Hong Kong dollar hits 7.75 or 7.85, the HKMA is obligated to intervene. This week, as expectations of RMB depreciation led many companies and households to convert RMB deposits into Hong Kong dollar accounts, the Hong Kong dollar hit the strong-side convertibility limit of 7.75.
Since the People's Bank of China devalued the RMB three weeks ago, the market has been speculating that Hong Kong will abandon its peg to the US dollar. The strengthening currency has hurt Hong Kong's retail sector. Even before the RMB devaluation, Hong Kong's retail sales in July fell by 2.8% year-on-year, significantly higher than the 0.4% decline in June. Furthermore, because the Hong Kong dollar is pegged to the US dollar, Hong Kong's monetary policy follows that of the United States. With the Federal Reserve poised to raise interest rates, Hong Kong's cost of capital may also rise significantly, thereby putting pressure on the local economy.
However, economists believe that the HKMA will not easily abandon the linked exchange rate system.
First, WorldWay growth has been very weak. A peg to the US dollar can reduce exchange rate risks for exporters. Capital Economics analyst Chang Liu stated: "In a small economy highly dependent on trade (exports are equivalent to 200% of Hong Kong's GDP), this represents a huge advantage."
Second, the HKMA firmly believes that abandoning the peg would damage investor confidence and could trigger catastrophic capital outflows, according to UBS strategist Teck Leng Tan.
Third, UBS believes that historically, the Hong Kong dollar is not considered expensive right now and remains significantly lower than in 1998, when the HKMA resolutely defended the linked exchange rate system.
UBS wrote in its report: "Although the real effective exchange rate (REER) of the Hong Kong dollar has indeed risen to a higher level since 2009, the current economic growth and inflation environment are very different. Furthermore, the current real effective exchange rate of the Hong Kong dollar is still nearly 40% lower than the level during the 1998 Asian financial crisis, when Hong Kong's economy was in much worse shape."
The HKMA clearly has the ability to maintain the linked exchange rate system for the time being. Currently, the HKMA holds 340 billion US dollars in foreign exchange reserves, which is nearly double Hong Kong's entire monetary base of 183 billion US dollars.