Key Information

inSight
Speeches
Speeches by Speaker
Norman T.L. Chan
Peter Pang
Eddie Yue
Arthur Yuen
Zeti Akhtar Aziz
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
531.2615

insight

Stay Calm on the Weakening of the Hong Kong Dollar

(Translation)

There have been concerns and discussions in the market about the recent weakening of the Hong Kong dollar (HKD).  Based on the discussions it is apparent that there are some misunderstanding and queries about the mechanism of the Linked Exchange Rate system (LERS).  I would like to have them clarified with the following Q&As.

1.  As the HKD exchange rate has dropped below 7.80 recently, is the HKMA worried about the HKD weakening and will the HKMA intervene in order to prevent the HKD from depreciating?

  • The view as implied in the question is incorrect. As an international commercial, trade and financial centre, there are always a large amount of funds flowing freely into and out of Hong Kong.  However, under the LERS, the HKMA acts as a “super money changer”. When there are fund inflows, the HKD exchange rate against the US dollar (USD) will not go beyond 7.75 as there is strong-side Convertibility Undertaking.  On the other hand, when there are fund outflows and the HKD weakens, the HKMA will sell USD and buy HKD at 7.85 so that the HKD exchange rate will not fall below the weak-side Convertibility Undertaking.
  • The US Federal Reserve has raised interest rates five times since December 2015, widening the spreads between HKD interest rates and their USD counterparts and thereby encouraging funds to flow from the HKD into the USD.  It is only natural that the HKD would weaken as a result.  However, this should not cause any concerns, as the HKMA will take action when the HKD exchange rate touches the weak-side Convertibility Undertaking (7.85) to ensure that it will not fall below 7.85.

2.  The HKD exchange rate dropped to 7.836 yesterday, the weakest in 33 years.  Why didn’t the HKMA intervene?

  • As mentioned above, the HKMA will take action when the HKD exchange rate touches 7.85.  This is the design of the LERS following the refinements to the system in 2005.  After the implementation of the LERS in 1983, except for some isolated cases in the early stage, the HKMA in general took action when the HKD exchange rate fell to the 7.80 level.  The weak-side Convertibility Undertaking has been adjusted from 7.80 to 7.85 following the refinements to the system in 2005.  The HKD has since leaned towards the strong side for most of the time. So when the exchange rate fell below 7.83 recently, there was some saying about the HKD falling to its lowest level in 33 years.

3.  If the HKMA is not concerned about the weakening of the HKD, why did it issue additional Exchange Fund bills when the HKD was weakening last year?  Was it intended to prevent the HKD from depreciating as suggested by some market players?

  • This is not true.  The issuance of additional HK$80 billion worth of Exchange Fund bills by the HKMA last time was solely in response to market demand for highly liquid instruments and had nothing to do with the strengthening or weakening of the HKD.  We do not have plans to issue additional Exchange Fund bills for the time being and hope that market players will not take it wrongly that the HKMA does not want the HKD to weaken.  In fact, with the widening of the spreads between HKD and USD interest rates, we are looking forward to funds flowing from the HKD into the USD, causing the HKD exchange rate to reach 7.85, a level where the HKMA will take action.  This will allow the Monetary Base to contract gradually and create an environment conducive to the normalisation of HKD interest rates.

4.  Will the HKMA be capable of supporting the HKD?

  • Yes, of course.  First of all, one must understand how the Currency Board system operates.  Since the introduction of the Quantitative Easing by the US in 2009, there have been roughly US$130 billion worth of capital inflows into Hong Kong which were then converted into Hong Kong dollars through the banking system and the HKMA.   After receiving these funds which are equivalent to HK$1 trillion, the HKMA has placed them entirely in the Backing Portfolio (BP) of the Exchange Fund.  The BP primarily holds highly liquid, high quality US dollar-denominated assets, such as US Treasuries, which can be readily converted into USD cash.  The HKMA can therefore act as a “super money changer” to meet the conversion demand arising from any significant fund outflows in extreme circumstances.

5. Will significant fund outflows within a short span of time disrupt the normal functioning of the banking system and even the overall economy of Hong Kong?

  • Maintaining banking stability in Hong Kong is always among the first and foremost priorities of HKMA’s work.  The robustness of the banking system hinges crucially on the sufficiency of its liquidity and capital.  Under the rigorous supervision by the HKMA, the average capital adequacy ratio of local banks in Hong Kong was 18.7% at the end of Q3 in 2017, a very high level by international standard.  Banks also held more than HK$4 trillion in highly liquid assets (of which over HK$3 trillion being foreign currency assets) at the end of 2017.  This is several times higher than the HK$1 trillion inflows into Hong Kong since 2008, providing a strong buffer against any fund outflows.
  • Besides, the HKMA conducts stress tests on banks from time to time to ensure they are able to cope with extreme cases of significant fund outflows within a short span of time.

6.  Will the continued weakening of the HKD and huge fund outflows lead to systemic risk and even trigger a financial crisis?

  • The resilience of banks and financial system in Hong Kong has been greatly enhanced.  The Exchange Fund of Hong Kong holds over HK$4 trillion worth of assets, more than 80% of which being foreign exchange reserves, providing a powerful line of defence for our financial stability.  Besides, the HKD Monetary Base amounted to about HK$1.7 trillion, providing a strong buffer in the event of fund outflows.  In the past years, the HKMA has enhanced the robustness of the local banking sector through rounds of counter-cyclical and other regulatory measures.  Hong Kong has weathered through the Global Financial Crisis in 2008 and the European Debt Crisis in 2011 unscathed.  We are confident that Hong Kong can rise up to future challenges from potential asset market volatilities and fund outflows.
  • Previous inSight articles on the LERS are available for those interested in further reading.
    - Linked Exchange Rate System” by Mr Norman Chan, published on 15 August 2011
  - The Recent Inflow of Funds into Hong Kong and Operation of the Linked Exchange Rate System” by Mr Norman Chan, published on 9 November 2012
  - The Linked Exchange Rate System – 30 Years On” by Mr Norman Chan, published on 14 October 2013
  -   The Hong Kong Dollar Linked Exchange Rate System" by Mr Howard Lee, published on 27 January 2016

 

 

Norman Chan
Chief Executive
Hong Kong Monetary Authority

8 March 2018

 

Last revision date: 12 March 2018
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
Information in Other Languages (Bahasa Indonesia, हिन्दी, नेपाली, ਪੰਜਾਬੀ, Tagalog, ไทย, اردو)
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