The Hong Kong Monetary Authority said on Thursday that the decline in foreign currency reserve assets in August was due to a “technical classification” rather than a real change in the amount held by the city’s de-facto central bank.
Foreign exchange reserves fell from a record high of US$448.4 billion in July to US$432.8 billion last month, with the sharp US$15.6 billion decline the biggest since monthly data was first published in 1997.
“The decline in foreign currency reserve assets in August was mainly due to a transfer of funds resulting in a higher amount of foreign currency deposits placed by the Exchange Fund with banks in Hong Kong,” according to the spokeswoman at the Hong Kong Monetary Authority (HKMA).
Since foreign currency assets at local banks are not classified as reserves according to the guidelines of the International Monetary Fund, then the drop in foreign exchange reserves in August was merely a technical classification, the HKMA explained.
This is about technical classification rather than real changes in the total amount of foreign currency assets. In fact, the Exchange Fund’s total foreign currency assets and liquidity have remained stable
“As such, this is about technical classification rather than real changes in the total amount of foreign currency assets. In fact, the Exchange Fund’s total foreign currency assets and liquidity have remained stable,” it added.
Analysts, however, argued that the fact that the city’s foreign exchange reserves dropped sharply in August and foreign currency assets had been transferred to local banks, it should still be seen as a capital outflow transaction under the city’s balance of payments, which records all monetary and economic transactions with the rest of the world.
But analysts said that they would need to wait until the release of the quarterly balance of payment data later this year to obtain a clearer picture of the movement of Hong Kong assets and thus the strength of the economy compared to opportunities that exist abroad.
Hong Kong is expected to release its second quarter balance of payments data in mid-September and third quarter figures in mid-December.
Given the shift in assets to local banks, “that transaction should be recorded under ‘other investment: money and deposit’ as an outflow technically, from the perspective of the balance of payments,” said Frances Cheung, Asia head of macro strategy at Westpac Banking Corporation. “We can only wait for the official breakdown for a confirmation.”
Nathan Chow, senior economist at DBS Bank, questioned why the sharp decline in foreign exchange reserves accompanied by the “technical classification” explanation did not occur until now.
If you have less foreign exchange reserves then it looks like you have less money because it has been leaked out,” Chow said
“If you have less foreign exchange reserves then it looks like you have less money because it has been leaked out,” Chow said.
Carie Li, an economist at OCBC Wing Hang, said that Hong Kong would probably need to wait for a longer period of time to see if the drop in foreign exchange reserves would continue and reflect serious capital outflows.
Currently, Hong Kong’s is probably not suffering from massive amounts of capital outflows given that the recent recovery in the stock market and local currency, Li said.
The risk of large capital flight out of Hong Kong would only be triggered if there was a further escalation in the mainland’s trade war with the United States or in city’s ongoing anti-government protests, Li added.
In addition, if the US government were pass into law the Hong Kong Human Rights and Democracy Act, which would require the US government to assess annually Hong Kong’s level of political autonomy to determine whether it should continue to have a special trading status with the US, it could have a chilling effect on investment in Hong Kong.
Last month, the HKMA rejected rumours that it had loaned US$400 billion of its foreign currency reserve to mainland China through currency swaps and has not received repayment. HKMA stressed that the foreign currency reserve is monitored by Hong Kong’s Audit Commission as well as other independent auditors.
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