In my article last week, I pointed out that the national security legislation in Hong Kong will not bring any change to our monetary and financial systems. The HKMA has the capability, resources and commitment to safeguard Hong Kong’s monetary and financial stability. Recently, there have been some discussions in the community about the sustainability of the Linked Exchange Rate System (LERS) and whether to exchange Hong Kong dollar (HKD) for US dollar (USD). Let me further share with you my views on this subject.
Last Saturday, the US Administration announced that it will end its special treatment for Hong Kong. While details are yet to be unveiled, there are concerns in some quarters of the community about the implications for Hong Kong. Such concerns are understandable. However, we must get a full grasp of the facts in order to be able to analyse the situation in an objective manner.
Over the last few days, the HKD market has been functioning normally, with interest rates staying low and the HKD exchange rate remaining stable. While some market reports suggested that the HKD exchange rate weakened “sharply” on 22 May, the fact is that it just eased slightly to 7.7578, a mere 0.1% away from the strong-side Convertibility Undertaking of 7.7500. Latest figures from several major banks also show that deposits remained stable in the last few days. All these point to the fact that there have not been significant fund outflows from either the HKD or the banking system. Separately, there were some news reports about shortage of USD banknotes in certain bank branches in light of higher customer demand. Actually there is no shortage of USD banknotes in our banking system, and the demand will be fully met when banks step up their banknote distribution logistics. On the whole, the local financial market continues to operate in a smooth and orderly manner, reflecting strong market confidence in the LERS, a regime that is clear, transparent and proven to work well.
As I have mentioned before, Hong Kong has strong fundamentals and a robust financial system, and is able to rise up to challenges:
- the LERS is underpinned by sizeable foreign reserves of over US$440 billion, which is more than two times our monetary base;
- our banking system has strong capital position (capital adequacy ratio currently at 20%), abundant liquidity (liquidity coverage ratio at 160%), and good asset quality (classified loan ratio at 0.6%). All these ratios fare very well by international standards;
- Hong Kong is all along a leading international financial centre and a dominant gateway to the Mainland’s capital markets. Currently, more than half of the stock and bond investments on the Mainland by overseas financial and other institutions are conducted through Hong Kong. As pointed out by some major investment banks, for return-focused international investors and multinational firms, Hong Kong’s unique advantages and strengths are still there and Hong Kong remains a place of choice in terms of tapping the vast opportunities on the Mainland.
There have also been some concerns on whether the LERS can be “unilaterally revoked” by the US, citing the US-Hong Kong Policy Act, which mentions the free exchange of the USD with the HKD. Some even suggested the US could deny Hong Kong’s access to the USD clearing system. While apocalyptic theories always have their audience, let me share a few points with you:
- Like other jurisdictions, Hong Kong can decide on its own appropriate monetary regime including exchange rate policy. Indeed, the LERS was introduced in Hong Kong in October 1983, much earlier than the passage of the US-Hong Kong Policy Act by the US Congress in 1992, which granted special treatment to Hong Kong. In other words, the LERS was not established under the Act as a special privilege, but rather introduced by Hong Kong based on our own considerations for financial and monetary stability. For the past 36 years, the LERS has withstood the test of various market shocks and has been operating smoothly all along. It is a pillar of Hong Kong’s monetary and financial systems and will not be changed because of any shift in foreign policies towards Hong Kong.
- Hong Kong is a major international financial centre and the world’s third largest USD forex trading centre, serving numerous multinationals in the Asia-Pacific region and across the globe, with services ranging from investment and wealth management to trade and settlement. With Hong Kong’s financial system closely integrated with the global economic and financial systems, any move that hits our financial system would also send shock waves across the global financial markets, including the US. Confidence of international investors in using the USD and holding US financial assets could also be undermined.
Against this background, I am sure readers can form their own views on the probability of such an extreme situation. As the world is still recovering from the impact of the novel coronavirus outbreak, Hong Kong, as a member of the international community, hopes that all parts of the world will join hands in reviving the global economy and preventing further market turmoils.
It is unavoidable that rumours abound in times of uncertainty. One of the key responsibilities of the HKMA is to maintain market confidence in the LERS and the financial system in Hong Kong, and I believe the best approach is to stick to facts and uphold a high degree of transparency. Hong Kong is a free economy where HKD is freely convertible under the LERS. Article 112 of the Basic Law also clearly stipulates that no foreign exchange control policies shall be applied in Hong Kong and the free flow of capital shall be safeguarded. Of course, the public can continue to allocate assets based on their own needs. But such decisions should not be made rashly simply out of some unfounded speculations.
You will recall that during the social incidents last year, there were also rumours about the LERS and capital outflows. Some “experts” even advised the public to sell the HKD for the USD. These rumours turned out to be all wrong. We saw fund inflows instead of outflows. The HKD exchange rate also strengthened to the strong side of the convertibility zone. These “experts” and other speculators alike had suffered losses as a result. Indeed, Hong Kong’s financial sector continues to display strong resilience in adversity: the Stock Exchange of Hong Kong (HKEX) continues to be the world’s top listing destination, turnover of the Shanghai-Hong Kong Stock Connect has doubled, and that of the Bond Connect has tripled. All these are a testament to Hong Kong’s edge as a dominant gateway to the Mainland. More recently, MSCI decided to license to the HKEX the issuing of futures and options contracts based on a suite of MSCI indexes on Asia and emerging markets, casting another vote of confidence in Hong Kong.
I hope that these objective facts and data can reinforce your confidence in the financial stability of Hong Kong. While the local epidemic situation has stabilised, our economy has yet to regain momentum. Let’s all stand and work together in getting our economy and lives back to normal.
Eddie Yue
Chief Executive
Hong Kong Monetary Authority
2 June 2020
