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LCQ3: Speculations on Hong Kong dollar

     Following is a question by the Hon Dennis Kwok and a written reply by the Financial Secretary, Mr John C Tsang, in the Legislative Council today (February 24):


     It has been reported that speculators, in anticipation of further depreciation of the Reminbi (RMB), may use the Hong Kong dollar (HKD) as a proxy to speculate on RMB. Moreover, it is expected that the United States (US) Federal Reserve's decisions to raise the interest rate will lead to a rise in local interest rates, given the peg of HKD to the US Dollar under the Linked Exchange Rate System (LERS). In this connection, will the Government inform this Council:

(1) whether the authorities have policies and measures in place to maintain the stability of HKD in face of massive selling of HKD as a proxy of RMB speculation by hedge funds and other speculators, so as to mitigate the risks of recurrence of situations similar to those in 1998 during the Asian Financial crisis; whether the authorities have assessed if the poor returns of the Exchange Fund in the past year will weaken the ability of the Hong Kong Monetary Authority to deal with speculations on HKD in the near future; and

(2) given the recent market turmoil in China, the anticipated further depreciation of RMB, as well as the HKD exchange rate hitting the weak-side convertibility undertaking on several occasions, what policies the authorities have put in place to ensure that market confidence in LERS will not be adversely affected?



     Hong Kong's monetary and financial system is robust. We have ample fiscal and foreign exchange reserves. The Linked Exchange Rate System (LERS) has been the cornerstone for Hong Kong's monetary and financial stability for over 30 years. With these, we are able to cope with sizeable funds flowing into and out of Hong Kong. We are also experienced in dealing with the challenges brought about by global economic fluctuations, and maintaining the stability of Hong Kong's monetary and financial markets.

     Since the commencement of the US Federal Reserve's interest rate hike in December 2015, the spreads between Hong Kong dollar and US dollar interest rates have widened. As a result, it is expected that there would be gradual outflows of funds from the Hong Kong dollar to the US dollar, and that the Hong Kong dollar exchange rate would start easing from the level of 7.75. However, the Hong Kong dollar exchange rate has not yet touched the weak-side Convertibility Undertaking level of 7.85.

     Since 1997 - 1998, the resilience of our banking and financial systems has increased significantly. It is now far more difficult for speculators to engineer any "double play" attacks on the Hong Kong dollar.

     Compared with the position in 1997, the Aggregate Balance of the banking sector, the Monetary Base and foreign currency assets of the Exchange Fund have increased many folds. The relevant figures are tabulated below:

Financial data        July 1997      January 29, 2016
--------------        ---------      ----------------

Aggregate balance       1.5             363.4
(HK$ bn)                              (+244.4 times)

Exchange Fund Bills    98.7             857.1
and Notes (HK$ bn)                    (+7.7 times)

HKD Monetary Base     189.6           1,609.5
(HK$ bn)                              (+7.5 times)

Exchange Fund's        67.6             422.3
foreign currency                      (+5.2 times)
assets* (US$ bn)

* Refers to the respective figures in June 1997 and December 2015.

     The above figures suggest that if speculators were to try to push up the Hong Kong dollar interest rates, the cost would be high. In addition, since the global financial crisis in 2008, governments all over the world have been implementing financial reforms and tightening supervision, making massive speculative activities on the Hong Kong dollar more difficult.

     The Exchange Fund's foreign currency assets stood at US$422.3 billion. The small negative investment return (-0.6%) reported last year would not impact on our ability to defend the monetary and financial systems.

     Since 2009, the Hong Kong Monetary Authority (HKMA) has introduced seven rounds of countercyclical and other prudential measures which have significantly strengthened the resilience of the banking system in Hong Kong. Our banking sector is robust, with the overall capital adequacy ratio exceeding international standards comfortably, and we do have abundant liquidity. These enable our banking system to meet the challenges arising from market volatility and outflows of funds.

     The Government and the HKMA have since January this year repeatedly explained to the public that Hong Kong's financial system is fully capable of dealing with outflows of funds. We have also reiterated that our determination and ability to maintain the LERS are beyond doubt. At the same time, the International Monetary Fund and a number of large investment banks have published reports confirming the robustness and appropriateness of the LERS.

     The Government and financial regulators would continue to maintain close contact, monitor latest market developments closely, and stand ready to undertake measures to safeguard the stability of Hong Kong's monetary and financial systems. The public should not worry.

Ends/Wednesday, February 24, 2016
Issued at HKT 18:34


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