|
Flows of Hong Kong dollars Fund flows need to be correctly understood. There has been much market talk about the outflow of funds. I think all concerned, whether talking, listening, or trading on the basis of the market talk, should make sure that they know what exactly the term means and how it applies in the monetary system of Hong Kong. First, it is important to understand that any inflow or outflow of funds involves an origin and a destination, in other words a flow from one source to another. Typically, when people talk about an outflow of funds, they mean foreign exchange: in our case, for example, a switch of money from the Hong Kong dollar into a foreign currency. But the term can also be used in a geographical context, involving the movement of money, in whatever currency, out of Hong Kong and booking it elsewhere. In the case of an outflow of funds from the Hong Kong dollar into foreign currencies, it is important to remember that where there is a seller of Hong Kong dollars, there is also a buyer. A foreign exchange transaction between the Hong Kong dollar and a foreign currency involves merely a change of ownership of the Hong Kong dollars. This may arise from a foreign investor exiting from the Hong Kong stock market; a speculator squaring a long position in Hong Kong dollars; or a foreign issuer switching IPO proceeds into foreign currencies, to a bank or another foreign investor; or an exporter repatriating his export earnings. Of course, if there is greater pressure on the selling side than on the buying side of Hong Kong dollars, then the exchange rate, under our free-market environment, would weaken, as it did (mildly) in the past couple of months. But the Hong Kong dollars merely changed hands. It is possible that the pressure on the selling side is so much greater than on the buying side that the market exchange rate is pushed to a level that triggers foreign exchange market intervention by the HKMA, in accordance with the Currency Board arrangements. As those familiar with our very transparent monetary system will know, the intervention can take two forms: the selling of US dollars either on a discretionary basis within the Convertibility Zone, or on a non-discretionary basis at the weak-side Convertibility Undertaking rate of 7.85. Only when either of these happens can we say that there has been an outflow of funds from the Hong Kong dollar. Either action will lead to a reduction in the Aggregate Balance of the banking system, a crucial component of the Monetary Base, and a rise in the interbank interest rates, which then makes the Hong Kong dollar more attractive in terms of higher interest income and therefore, hopefully, stems the outflow. The amount of outflow can be measured by the extent of foreign exchange intervention conducted by the HKMA and, considering the structure of our monetary system, should be quite small. Perhaps those talking about an outflow of funds were actually referring to a possible desire by investors to exit from the Hong Kong stock market. Again, where there is a seller there should also be a buyer, although, if for the market as a whole there is a greater pressure on the selling side than on the buying side, stock prices may decline and the "outflow" then appears as a depreciation of the stock values. Conversely, an "inflow of funds" into the stock market may lead to an appreciation of the value of the existing stocks, although new issues may also absorb all or part of the inflow. I think it would be useful for us to be a little more precise when talking about inflows or outflows of funds, by specifying, for example, from where to where such flows are being effected. As far as the Hong Kong dollar is concerned, there has not been any net outflow into foreign currencies since May 2005 after the introduction of the three refinements to the Linked Exchange Rate system. When it happens, everyone will know it by monitoring the information we disclose, in real time, through the electronic media, in particular the size of the Aggregate Balance, and of course the level of the exchange rate. It is possible, though, as ownership of Hong Kong dollars changes among different entities, that the performance of different financial markets may be affected. ¡@ Joseph Yam Click here for previous articles in this column. ¡@ |
¡@
