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

Get a Full Grasp of the Situation and Stay Calm

(Translation)

Going into 2016, the rainy chill is like the sentiments in the financial markets in recent days.  This morning, I was supposed to report to members of the Legislative Council and the public on the latest situation of the financial markets at the meeting of the Legislative Council Panel on Financial Affairs .  Unfortunately, the meeting was adjourned.  Let me offer my views, through this inSight article, on some public concerns and anxieties on the Hong Kong dollar exchange rate and fund flows recently.

Our economic and financial environment is facing challenges on various fronts: slowdown in economic growth, moderation in credit expansion of banks with signs of deterioration in their asset quality, uncertainties in the property market and volatility in the financial markets.  Compounded by the easing growth rate of the Mainland China economy and weakening renminbi exchange rate, some investors turned bearish on the prospects of the Mainland and Hong Kong economy.  Rumours about financial market predators taking short positions against the Hong Kong dollar are rampant.

Amid worries about the stability of Hong Kong’s financial systems, some compared the current situation with the Asian financial crisis in 1997-98 when the Hong Kong dollar was subject to a double-play attack staged by financial market predators.  The fierce battle my colleagues and I had with those predators seemed like yesterday.  But there is no cause for anxiety now as our financial systems are way more robust than at that time.

This is not wishful thinking.  You will know the reason when you look at the table below on assessment of risks to Hong Kong’s financial stability:

Financial data

July 97

29/01/2016

Aggregate Balance (HK$ bn)

1.5

363.4  (244.4 times)

Exchange Fund Bills and Notes (HK$ bn)

98.7

857.1 (7.7 times)

Monetary Base (HK$ bn)

189.6

1,609.5 (7.5 times)

Exchange Fund’s foreign currency assets* (US$ bn)

67.6

422.3 (5.2 times)

Hong Kong Stock Market#

July 97

29/01/2016

Market capitalisation

(HK$ bn)

4,607.2

21,616.0 (3.7 times)

P/E ratio

19.2

8.0 (-58.3%)

P/B ratio

2.3

1.0 (-55.6%)

() denotes the magnitude of change
*refers to figures in Jun 97 and Dec 2015.
# P/E and P/B ratios correspond to those of the Hang Seng Index.

The Aggregate Balance of the banking sector, the Monetary Base and foreign assets of the Exchange Fund have grown exponentially since 1997.  This tells us that speculators will have to mobilise hundreds of billions of Hong Kong dollars to short-sell the Hong Kong dollar in order to push up interest rates.  This is very difficult.  Moreover, the current price-to-earnings ratio of Hong Kong stock market is only 8x, comparing to 19x in 1997.  There is limited scope to profit by short-selling Hong Kong stocks or futures.

Technically, speculators short-selling the Hong Kong dollar will have to take huge short positions in the Hong Kong dollar forward market.  However, the forward market is thin.  If speculators were to make drastic moves in the forward market, the Hong Kong dollar forward exchange rate would drop quickly due to scanty trades, driving up the cost of short-selling.  As such operation is not discreet, coupled with the escalating costs involved, it could rarely be successful.

Besides, ever since the global financial crisis in 2008, governments all over the world have been implementing financial reforms and tightening supervision.  Constrained by Basel III and various supervisory requirements, banks are less likely to lend large amount of Hong Kong dollar funds to speculators as in the past.  This limits the scale of the speculative activities.

In addition, the banking sector in Hong Kong remains robust, with the overall capital adequacy ratio exceeding international standards and abundant liquidity.  The seven rounds of countercyclical and other prudential measures introduced by the HKMA over the past years have also significantly strengthened resilience of our banking system. 

That said, there is no room for complacency and the HKMA remains vigilant.  We monitor and collect real time intelligence in the market and are therefore able to respond promptly if abnormalities in the markets are detected.

The US rate hike last December kick-started the process of interest rate normalisation.  There have been some outflows from the Hong Kong dollar, driving up Hong Kong dollar interbank rates and narrowing the spreads between Hong Kong dollar and US dollar interest rates.  However, we believe that the pace of further US rate hikes should be gradual.  Buttressed by a sizable Monetary Base (some US$130 billion have flown into the Hong Kong dollar since 2008, with the Monetary Base now standing at HK$1.6 trillion), we have large buffer to withstand outflows.  Therefore, we believe that adjustments in local interbank rates should not be too rapid.

With fund outflows from Hong Kong, we should be prepared that the Hong Kong dollar will eventually weaken to 7.85, the weak-side Convertibility Undertaking.  This is unavoidable in the process of the normalisation of Hong Kong dollar interest rates.  When this happens, according to the automatic adjustment mechanism of the currency board arrangement, the HKMA will buy Hong Kong dollars from and sell US dollars to banks, resulting in a contraction in the Monetary Base and an increase in the Hong Kong dollar interest rates, such that the Hong Kong dollar exchange rate will  stay within the convertibility zone of 7.75-7.85. 

I hope the foregoing can reinforce your confidence in the financial stability of Hong Kong.  There are always scaremongers spreading anxiety, pessimism and even panic whenever the market rattles.  They do this in order to make gains during a market downturn.  Vigilance is one thing but panicking is another.  Therefore, we must get a full grasp of the situation and stay calm, especially when referring to the Linked Exchange Rate System.  The HKMA’s determination and ability to maintain the System are beyond doubt.

The Observatory forecasts a sunny spell during the Chinese New Year next week.  Though the Hong Kong markets will be closed, we will continue to keep a watchful eye on the external markets.

 


Norman Chan
Chief Executive
Hong Kong Monetary Authority

1 February 2016

Last revision date: 1 February 2016
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