![]() Facebook | Northern Trust Facebook Northern Trust is a global financial services firm.Youtube | Northern Trust Videos Videos from Northern Trust, a leading provider of investment management, asset and fund administration, fiduciary and banking solutions for corporations, institutions and affluent individuals worldwide.Hong Kong is likely to remain the city that connects the East and the West. But neither the city’s financial stability nor the stability of its peg is under immediate threat. This has led to a strengthening of the HK$.Įvolving global circumstances are presenting a new set of challenges for Hong Kong. Over the course of the past few weeks, Hong Kong’s overnight funding costs have surged to their highest since 2007 as the HKMA continues to purchase local dollars to dry up liquidity. Even if the aggregate balance were to drop to zero, the city’s central bank can mobilize its second line of defense: $430 billion in foreign exchange reserves to support the peg. Hong Kong continues to have a healthy IPO pipeline, with over 90 active applicants at the end of the quarter. The number of public offerings has increased slightly, signifying the city’s resilience in challenging times. This should help ease pressure on the HK$. Removal of COVID-related restrictions has led to visible improvements in activity and cross-border travel this year. Hong Kong’s dollar peg is under stress, but not under threat. This has prompted concerns that Hong Kong will lose some of its standing as a global financial center, contributing to an outflow of talent and investments. Hong Kong’s economy has struggled in recent years under stringent COVID controls, while its alignment with China has deepened. Macroeconomic and geopolitical factors have also been at play. The number of new stock listings fell off a cliff, witnessing a 74% year-on-year decline to HK$73.2 billion in the first nine months of 2022.Ĭonsistent with global trends, IPO proceeds in Hong Kong declined by 50% year to date compared to the first quarter of 2022. ![]() The deep discount invited carry trade strategies, where investors borrow at lower rates to invest in more lucrative markets, which added pressure on the HK$.Ī drought of initial public offerings (IPO) activity last year on Hong Kong’s exchange further dampened demand for Hong Kong dollars. and Hong Kong widened to 200 basis points earlier this year, from near parity last November. As a result, the gap between the overnight rates in the U.S. The aggregate balance (a measure of liquidity in the banking system) has tumbled from HK$320 billion to below HK$50 billion in the past year, the lowest levels since the 2008 financial crisis.ĭespite the use of so much liquidity, HKMA’s move didn’t drive up local borrowing costs amid weak loan demand. In total, over 40 interventions have been required to keep the currency at its peg. The HKMA has bought about HK$47 billion to support the local currency this year, after having deployed over HK$240 billion in 2022. This requires the Hong Kong Monetary Authority (HKMA), the city’s central bank, to intervene into the currency markets by selling or buying every time the domestic currency falls or rises beyond the band. Hong Kong’s monetary policy has been run in lockstep with the Fed for four decades. The Hong Kong dollar has a predictable value and is easily convertible, contributing to the city’s dominance as a global financial hub. This has raised renewed concerns over the dollar peg and its economic implications.Ī stable currency is considered an anchor for financial stability in an open economy like Hong Kong, where trade and logistics are key drivers. Federal Reserve started hiking rates in March 2022 to tame inflation, the local currency has been trading at the weak end of its target band. dollar, the Hong Kong dollar (HK$) is generally a stable currency. Pegged in a band of HK$7.75–7.85 per U.S. Bad news continues to pile on for the city, most recently in currency markets. Hong Kong has earned some unenviable headlines in the last four years, from unrest triggered by the National Security Law to the city’s stringent COVID control measures.
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