In the last article we focused on discussing the Balance of Payment (BoP) statistics and explained why, because of the way the statistics are defined, changes in BoP positions may not necessarily involve cross-border fund flows.1 In that article I foreshadowed another piece on how to observe fund flow situation in the most timely manner. Here is what I promised.
First of all, let’s take a holistic view of what cross-border fund flows involve. An international financial system like Hong Kong embraces a full array of financial and investment activities. A large number of local and overseas institutions and individuals participate in trading of equities, bonds and real estates, as well as capital raising, lending and borrowing, and many other financial intermediary services. Hong Kong people are also no strangers to investing in overseas financial products and real estates, and Hong Kong has a lot of cross-border trade activities too. Therefore, an enormous amount of funds flow into and out of Hong Kong every day. Even many of our day-to-day activities such as online shopping on overseas websites or overseas travelling may create cross-border fund flows. The net inflow or outflow during any particular period of time is the sum of fund flows arising from all these economic and financial activities. Given these numerous on-going activities, it is logically unsound to try to conclude that there was fund inflow or outflow based upon a rise or fall in investments in merely one particular financial segment.
This is exactly the fallacy of some news reports when they said that Hong Kong had experienced outflow of funds based on just a survey showing a fall in portfolio capital from investment funds in Hong Kong by a few billions US dollars from April to October this year. The fact of the matter is that the survey only covered changes in the investment amount of equities funds. It did not include moneys that investors directly put into Hong Kong equities without going through investment funds, and therefore represented only a portion of total investments in Hong Kong equities. This is borne out by the fact that the turnover amount of Hong Kong’s equities market can often exceed US$10 billion on a single trading day. Furthermore, the surveyed figure did not take into account fund flows arising from activities other than equities investments such as capital raising and trades. It is therefore very obvious that this number alone does not represent Hong Kong’s overall net fund flow situation.
There were also commentaries suggesting that the growth of deposits during a particular period of time in another economy had come from fund outflow from Hong Kong. This is merely a conjecture without any basis, because very often deposits in Hong Kong also increased during the same period. In fact, with the vast amount of global liquidity searching for yields, total deposits in Hong Kong increased by HK$7 trillion in the past decade, but it is hard to pinpoint the exact origins of these funds.
For those who are interested in Hong Kong’s fund flow situation, they may consider looking more closely at two data: the HKD exchange rate and the Aggregate Balance, which are updated in real time and publicly available. They reflect Hong Kong’s overall fund flow direction in a more comprehensive and timely manner. Under the Linked Exchange Rate System, demand for Hong Kong dollars will naturally decline if a massive amount of funds move out of the HKD system. This would cause the HKD exchange rate to weaken, potentially to the extent of triggering the weak-side Convertibility Undertaking of 7.85 Hong Kong dollars per US dollar. But the HKMA has not been called upon to buy Hong Kong dollars at the weak-side Convertibility Undertaking since April this year, and the Aggregate Balance has remained stable at about HK$54 billion since then. On the contrary, the HKD exchange rate has steadily strengthened in the past few months. It gradually moved from 7.84 levels in August and September to 7.82-7.83 one to two months ago, before further strengthening to 7.78-7.79 levels in the past two to three weeks. Clearly this could not be a sign of funds flowing out of the HKD system.
The strong performance of the Hong Kong dollar and the stable Aggregate Balance are a reflection of financial market activities in the past few months. Fund-raising activities in Hong Kong’s equities market became more vibrant in the fourth quarter, with many new stocks being listed. HKEX’s data indicates that more than HK$167 billion was raised in the equities market in October and November. In December, banks’ demand for liquidity further increased, as they prepared for the year end. With the Aggregate Balance currently at a relatively low level, interbank interest rates have edged up markedly and the HKD exchange rate has strengthened as a result.
Hong Kong’s bank deposit amount is another useful data. If there is a sizable net fund outflow, bank deposits must decline. But bank deposits have remained steady in recent months. In the first ten months in 2019, HKD deposits increased by 3% and USD deposits increased by 1.8%, with total deposits edging up by 2.6%. While there were ups and downs in certain months, we should not read too much into such transient fluctuations because they could be affected by large IPOs in a particular month. More importantly, total bank deposits have indeed been on a rising trend in the past few months.
Taking into account these relevant data, we have not seen any significant fund outflow.
The social situation in the past six months has no doubt impacted on the real economy. But the financial market has remained stable, thanks to the well-tested Linked Exchange Rate System, Hong Kong’s robust banking sector, and the massive buffer and resilience that we have built up in the financial and banking systems over the years. Of course, we will continue to closely monitor the markets and fund flow situations.
We should emphasise that we are not seeking to paint a picture that there is no significant capital outflow. In fact, the public can see the figures for themselves as we operate in a highly transparent manner through publishing a variety of financial and banking statistics regularly. Besides, even if there really were fund outflow, we should not consider it very abnormal given Hong Kong’s role as an international financial centre. Our banking system is highly liquid and sound, and can handle such outflow without compromising our financial stability.
The HKMA has touched on the subject of fund flow for quite a few times because the topic involves many different statistics and concepts. What we hope to achieve is to help the public understand this topic in a more comprehensive and objective manner.
Howard Lee
Deputy Chief Executive
Hong Kong Monetary Authority
30 December 2019
1i.e. geographical movements of funds.
