The Hong Kong Monetary Authority (HKMA) stepped into the market on Tuesday to weaken the local currency for the third time this month, as capital continues to flow into the city ahead of several blockbuster stock offerings by Nongfu Spring, Ant Group and other start-ups.
The city’s de facto central bank sold HK$643 million (US$83 million) of Hong Kong dollars to bring the currency’s exchange rate below the 7.7500 per US dollar, according to a statement. The Hong Kong dollar was recently trading at 7.7502 per dollar, shy of the top end of a trading band that requires the monetary authority to intervene.
The monetary authority spent HK$114.41 billion of Hong Kong’s reserves through 35 market actions in the past four months to dampen the effects of surging capital inflows, as a gap in interest rates with the rest of the world and a white-hot market for initial public offerings (IPOs) continued to suck in money. The influx of funds defy doomsday predictions of capital flight from Hong Kong, even as the city finds itself between escalating tension between Washington DC and Beijing.
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“We have not seen any sign of capital leaving Hong Kong,” said Gordon Tsui, chairman of Hong Kong Stockbrokers Association. “In contrast, there is a lot of money rushing into Hong Kong, chasing after all the blockbuster IPOs like Ant.”
Ant, an affiliate of this newspaper’s owner Alibaba Group Holding, is pursuing a dual listing in Shanghai and Hong Kong, which could raise as much as US$30 billion from the two bourses, making it the largest stock sale in global financial history, stockbrokers said. Nongfu Spring, with the largest share of China’s bottled water market, is seeking to raise US$1.08 billion in Hong Kong.
Up to 64 companies have raised HK$92.8 billion in Hong Kong in the first six months, a 29 per cent increase in proceeds from the same period last year. That made Hong Kong the world’s second-largest destination for IPOs during the period, putting it in good position to reclaim the global crown for the eighth time in 12 years this year.
US President Donald Trump said that Hong Kong’s financial markets would “go to hell”, as he tightened a swathe of punitive measures in response to the Chinese legislature’s move to pass a national security bill on Hong Kong. The measures range from suspending Hong Kong’s autonomous status under US law, to rebranding products made in the city to “Made in China”, to putting 11 city and Chinese officials on a sanction list.
Still, capital kept flowing into Hong Kong.
A second reason that sucked in capital was the rebalancing of Hong Kong’s benchmark Hang Seng Index, adding such Chinese technology champions as Alibaba and Xiaomi. Their inclusion compel passive institutional investment funds to match their capital allocation to the gauge, as a way to benchmark their performance.
In the past few weeks, several of Alibaba’s biggest institutional investors including the Singapore government’s investment arm Temasek Group Holdings, Baillie Gifford & Co, and Matthews Asia have converted their American depositary shares of Alibaba into stocks traded in Hong Kong.
Mainland China’s investors also increased their stakes in the city’s stocks via the transborder channel known as the Stock Connect, buying HK$11.64 billion of shares on Tuesday, according to stock exchange data. That infusion of capital gave a further boost to the local currency.
“The rumours of capital outflow from Hong Kong are unfounded,” said Tsui. “The market has been flooded by international money inflows. Investors will put their money in the markets where they can make a profit and Hong Kong stock market is a profitable one.”
The aggregate balance, a measure of the local banking sector’s financial liquidity, rose to HK$188.38 billion this week, almost four times the HK$54.13 billion before the monetary authority’s first intervention this year in April.
The excess liquidity helped to lower the cost of funds, as measured by the Hong Kong interbank offered rates, or Hibor. One-month Hibor fell to 0.26 per cent on Tuesday, from 2 per cent at the end of March. That helped to lower the financing cost for businesses, as well as Hibor-based mortgages, offering breathing room to an economy mired in its worst recession in decades.
The Hong Kong dollar has been pegged at 7.80 to the US dollar since 1983. Since 2005, a trading band was established to allow it to strengthen to 7.7500 per dollar at the top end or weaken to 7.8500 at the lower end. The HKMA must buy or sell the local currency to keep the exchange rate within the band.
More from South China Morning Post:
- National security law: HKMA tells bankers it’s ‘business as usual’ as Hong Kong absorbed US$14 billion of fund inflows since April
- Over 30,000 Hong Kong companies enjoy six-month repayment holiday on HK$380 billion in loans under HKMA scheme to help them survive economic slump
- Donald Trump says Hong Kong markets will ‘go to hell’ because of Chinese control
- Hong Kong bank deposits expand by US$29 billion in June, biggest jump in over two years as hot money chases JD.com, NetEase mega IPOs