Howard Lee, Deputy Chief Executive, Hong Kong Monetary Authority
During yesterday’s London and New York trading hours, the HKMA conducted two foreign exchange transactions, buying Hong Kong dollars for US dollars for a total of HK$3.26 billion. These forex transactions were made at the weak-side Convertibility Undertaking (CU) rate of HK$7.8500 to the US dollar.
The two transactions were conducted in accordance with the design of the Linked Exchange Rate System (LERS) and upon banks’ request. Under the LERS, the Aggregate Balance of the banking sector will shrink on Monday upon settlement of the forex transactions from the existing HK$180 billion to HK$176.5 billion. As we have previously explained to the public, the reduction in the Aggregate Balance will create a conducive environment for the gradual normalisation of Hong Kong’s monetary conditions. It will also provide the condition for HKD interest rates to move closer to their US counterparts.
The Aggregate Balance is currently at a rather high level of HK$180 billion. We expect the pace of HKD interest rate normalisation to be gradual, where local interest rates will slowly move closer to their USD counterparts.
It is worth noting that even before the triggering of weak-side CU, interbank interest rates have already been rising slowly as US interest rates continued to rise. For example, one-month HIBOR increased from 0.22% around the end of 2015 to 0.80% recently, even briefly touching 1.00% at times.
The HKMA has pointed out on many occasions that in view of the rate hikes, borrowers should be mindful of higher interest expenses. They should manage risk prudently to ensure that their interest expenses would be affordable having regard to their income.
We would like to emphasise that both our forex operations and the outflow of funds from the Hong Kong dollar system are in line with our expectation and in accordance with the design of the LERS. The HKMA is fully prepared for capital outflows. The US$130 billion inflows into the HKD system after the Global Financial Crisis are invested by the Exchange Fund in highly liquid USD assets. These USD assets are readily available for meeting the triggering of weak-side CU by market participants.
The level of liquidity in our banking sector is high. In particular, banks in Hong Kong hold HK$4 trillion worth of highly liquid assets. They are fully capable of managing capital outflows. We should all note that the current market condition will facilitate a gradual rise in the Hong Kong dollar interest rates, and both the HKMA and the banking sector are fully capable of coping with this.
Before yesterday’s triggering of the weak-side CU, the HKD had briefly touched the 7.8500 level but the HKMA did not act in the market. We should note that many banks and financial institutions trade the HKD among themselves during a day, and some deals may be done at 7.8500 without the need to involve the HKMA. An institution may also have customers’ orders to buy HKD so that it does not need to sell HKD to the HKMA at 7.8500. But when a bank contacts us and requests us to do so, the HKMA will buy HKD from it. The HKMA will announce our forex transactions on the “interbank liquidity” page, published via certain financial data platforms and our official website. Interested parties may wish to check those pages to confirm whether the HKMA has conducted forex transactions.