Hong Kong-dollar deposits rise in October, Exchange Fund declines as months-long protests continue

Chad Bray

Hong Kong’s local currency deposits rose in October, but the city’s overall financial war chest declined as debt issued by the Hong Kong Monetary Authority (HKMA) fell during the month.

October’s Hong Kong-dollar deposits increased 0.4 per cent, or by HK$30 billion, to HK$6.91 trillion (US$880 billion) at authorised institutions in the city, according to data released by the HKMA.

The Exchange Fund, the war chest used to maintain the stability of the local currency, declined by 0.9 per cent, or HK$41 billion, to HK$4.188 trillion at the end of October. The fund had risen to a five-month high of HK$4.229 trillion at the end of September.

The decline in the Exchange Fund was driven by a HK$69.9 billion drop in Hong Kong-dollar assets because of a decrease in debt “issued, but not yet settled” during the month, the authority said.

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Foreign currency assets in the fund rose by HK$28.9 billion in October, “mainly due to an increase in unsettled purchases of securities and income from foreign currency investments”, according to the HKMA.

The decline in Exchange Fund assets came as the city’s economy had been hit hard by five months of protests and civil unrest, with the local economy entering a “technical recession” in the third quarter. Retailers, hotels and restaurants have suffered the most as the amount of tourists, predominantly mainland visitors, has declined sharply, falling by 43.7 per cent in October.

The protests began in June over a controversial extradition bill that would have made it easier to send criminal suspects to mainland China for trial. They have evolved into a broader movement railing against income inequality, a lack of affordable housing and Beijing’s influence over the city.

The pro-democracy camp won a landslide victory during this past weekend’s district council elections in a blow to the city’s pro-establishment camp. A period of extended calm has fallen over the city since the results were announced.

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The HKMA, the city’s de facto central bank, has not had to worry about using its exchange funds to defend the local currency amid the worsening protests.

The Hong Kong dollar has not once reached the weak end of its trading band against the US dollar since the protests began in June.

On Friday, it was changing hands at 7.83 against the US dollar. Under the city’s linked exchange rate system, the HKMA has a tight self-correcting mechanism to keep the currency trading in the 7.75 to 7.85 range. If it touches either end, the HKMA will use its reserves to defend the peg and keep the currency within the trading band.

Hong Kong’s M2, or banknotes and coins held by the public, including savings and time deposits, rose 0.4 per cent in October, after increasing 0.6 per cent in September.

M3, which is the broad money supply encompassing M2 and deposits with restricted licensed banks and deposit-taking companies, rose 0.4 per cent in October, after a 0.5 per cent increase in September.

Additional reporting by Karen Yeung.

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