Key Information

inSight
Speeches
Speeches by Speaker
Norman T.L. Chan
Peter Pang
Eddie Yue
Arthur Yuen
Raymond Li
Edmond Lau
Esmond Lee
Meena Datwani
Vincent W.S. Lee
James Lau
Joseph Yam
Y K Choi
William Ryback
David Carse
Tony Latter
Andrew Sheng
Hans Genberg
Simon Topping
Michael Taylor
The Honourable Donald Tsang
Chen Yuan
Dai Xianglong
Don Brash
Jaime Caruana
Andrew Crockett
Mario Draghi
David Eldon
Stanley Fischer
Timothy F. Geithner
Stephen Grenville
Kenneth G. Lay
William McDonough
Ernest Patrikis
Glenn Stevens
Jean-Claude Trichet
Tarisa Watanagase
Zeti Akhtar Aziz
Press Releases
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
Press Releases by Category
Bogus Voice Message Phone Calls
Banking in Hong Kong
Fraudulent Websites, E-mails and Telephone System, and other fraud cases
Granting of Banking Licences
Exchange Fund
Table of Multiples of Notes and Payments for Allotted Amount under non-competitive tender
Table of Multiples of Notes and Payments of Application Amount under non-competitive tender
Tender of Exchange Fund Bills and Notes
Tender Results of Exchange Fund Bills and Notes
Tentative Issuance Schedule for Exchange Fund Bills and Notes
Appointments and Departures
HKMA Pay Review
HKMA Publications
Speeches
The Hong Kong Mortgage Corporation
Hong Kong Note Printing Limited
Hong Kong Institute for Monetary Research
Exchange Fund Investment Limited
Others
Hong Kong Financial Infrastructure
International Relations
Investment Products Related to Lehman Brothers
Monetary Policy
Notes and Coins
Renminbi business
Credit Card Lending Survey
Monetary Statistics
Residential Mortgage Survey
Year 2000
Others
Guidelines and Circulars
Guidelines
Circulars
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
421.9001

insight

Further Net Inflow of Funds

(Translation)

After a net inflow of around US$100 billion into the Hong Kong dollar between August 2008 and December 2012, the exchange rate of the Hong Kong dollar against US dollar has again strengthened to 7.75, triggering the strong-side Convertibility Undertaking (CU) multiple times since 1 July.  Within two weeks (between 1 and 15 July), the HKMA has bought in a cumulative total of US$5.64 billion.  During New York trading hours yesterday, the HKMA further bought in US$690 million.  Since early July, the Aggregate Balance has increased by HK$49.05 billion to HK$212.92 billion due to net inflows.

With the Fed’s tapering of asset purchases and a general market expectation for policy rate rise by the Fed next year, compounded by the implementation of the Shanghai-Hong Kong Stock Connect, the net inflows of funds into the Hong Kong dollar has led many to second-guess.  Indeed, the exchange rate has only eased slightly after a net inflow of US$13.8 billion into the Hong Kong dollar in the fourth-quarter of 2012.  During most part of 2013 and the first half of 2014, the Hong Kong dollar exchange rate stayed close to 7.75, reflecting strong demand for the Hong Kong dollar.

So what caused the eventual triggering of the strong-side CU at 7.75 at this time of the year? According to our market information, the recent increase in demand for Hong Kong dollar was mainly attributable to ordinary commercial activities.  While some of the recent purchases of Hong Kong dollars may be associated with increases in allocations in Hong Kong equities by overseas investors, we find that the main reasons underlying the net inflows of funds should include the following –

(i)     The period between June and September each year is the peak season for dividend distributions by H-share companies, and the total amount of this year’s dividend distributions, is as large as HK$200 billion.  The Mainland companies concerned may have a certain amount of Hong Kong dollar.  But, given the large overall amount of H-share dividend distribution, and the fact that most of the income of these companies are in other currencies, there is very strong demand for Hong Kong dollar. 

(ii)     Furthermore, a number of cross-border merger and acquisition deals also added to the demand for Hong Kong dollar.  One of them was HK$53 billion share issuance by Citic Pacific for acquisition of its parent's assets, and another was Oversea-Chinese Banking Corporation's acquisition of Wing Hang Bank involving about HK$40 billion.  These two deals alone already involved around HK$100 billion.  We have already asked banks to advise their clients to spread out their Hong Kong dollar acquisition to reduce volatility in the exchange rate caused by large amount of purchase of Hong Kong dollar to settle the deals.  However, the large amount of funds involved in these merger and acquisition deals still posed upward pressure on the Hong Kong dollar exchange rate. 

(iii)     Owing to active initial public offerings, mergers and acquisitions, as well as dividend distributions in the market, the Hong Kong dollar liquidity has concentrated on a few receiving banks.  At the same time, banks were inclined to hold more liquidity for precautionary purposes around half-year end.  As such, the interbank Hong Kong dollar liquidity has been somewhat tightened, which jacked up the short-term Hong Kong dollar interbank offered rate to slightly higher than the US rate.  This induced some demand for Hong Kong dollar although the impact should be relatively small.

(iv)     Some suggested possible pre-positioning in Hong Kong dollar associated with the implementation of Shanghai-Hong Kong Stock Connect, thus driving up demand for Hong Kong dollar.  However, there is no need to buy Hong Kong dollar for this purpose since investment in A-shares via this conduit will be settled in renminbi, and overseas investors may convert US dollar into renminbi directly without first converting to Hong Kong dollar.

The direction of fund flows is influenced by changes in the market sentiment and external environment and is therefore difficult to predict.  It is equally difficult to predict the duration and size of inflows of funds into the Hong Kong dollar.  However, having regard to the ongoing listings, mergers and acquisitions, and dividend distributions in the market, we expect that the Hong Kong dollar exchange rate would remain strong in the near-term.  But funds do not flow in one direction only.  If investors convert their H-share dividends, or fundraisers convert the Hong Kong dollar raised, into foreign currencies, the upward pressure on the Hong Kong dollar could ease.

If funds continue to flow into the Hong Kong dollar, the HKMA will, in accordance with the Currency Board principles, sell Hong Kong dollar and buy US dollar at the rate of 7.75 to maintain stability of the exchange rate.  The inflows of funds will increase liquidity and hence stimulate asset prices, to which the public should stay alert.  Last year’s market turmoil caused by a large-scale outflow of funds from certain emerging markets showed that the direction of fund flows could change spontaneously in response to investors’ sentiments.  As the US economy recovers and its monetary environment normalises, there remain considerable uncertainties in the future direction of fund flows.  The public should be prudent when borrowing and investing.

 

Peter Pang
Deputy Chief Executive
26 July 2014

Last revision date: 26 July 2014
ABOUT THE HKMA
The HKMA
Tender Invitations
Careers@HKMA
Legislative Council Issues
Links
The HKMA Information Centre
KEY FUNCTIONS
Monetary Stability
Banking Stability
International Financial Centre
Exchange Fund
PUBLICATIONS & RESEARCH
Annual Report
Half-Yearly Monetary & Financial Stability Report
Quarterly Bulletin
HKMA Background Briefs
Reference Materials
Research
MARKET DATA & STATISTICS
CMU Bond Price Bulletin
Economic & Financial Data for Hong Kong
Monthly Statistical Bulletin
Monetary Statistics
KEY INFORMATION
Press Releases
Speeches
Guidelines & Circulars
Forthcoming Events
inSight
OTHER INFORMATION
Account Opening
Consumer Corner
Consumer Education Programme
Complaints about Banks
Complaints about SVF Licensees
Internet Banking
Fraudulent Bank Websites, Phishing E-mails and Similar Scams
Be Careful of Bogus Phone Calls and SMS Messages
Authenticate the Callers and Bank Hotline Numbers
Register of AIs & LROs
Register of Securities Staff of AIs
Register of SVF Licensees
Investment Products Related to Lehman Brothers
Photo Gallery