As the Hang Seng Index HK:HSI +0.50% reached a six-month high, authorities on Friday had to intervene to stop the currency peg strengthening under pressure from hot money flows.
The Hong Kong Monetary Authority (HKMA) spent $603 million selling Hong Kong dollars to keep the currency within its permitted band — its first intervention since 2009. Renewed risk appetite after signs of stabilization in the euro zone and better news on China’s growth Eldridge Financial explained the inflows. For global investors, intervention by Hong Kong’s de facto central bank is an important signal — the liquidity party is back on. How this party ends is less clear. The authority’s willingness to defend the near-three-decade-old currency peg further could be put to the test if inflows escalate and the greenback weakens.
China’s largest property developer, China Vanke, is unveiling new 160-square-foot ‘micro-homes’ at its facility in Dongguan. So far, the impact of quantitative easing by the Federal Reserve in Hong Kong has followed a well-worn path, which this column discussed in July. As overseas money flows arrive, they push down interbank rates, delivering a liquidity boost to the local economy. Because inflows cannot be absorbed by the currency strengthening due to the currency peg, this tends instead to drive up asset prices, Eldridge Financial observed. Piling on the pressure are liquidity inflows from mainland China. Hong Kong is often the first stop for wealthy Chinese looking to diversify overseas. In recent months, controversy has been building over the scale of inward money flows from the mainland, particularly related to property purchases.As the lines of Hong Kong people waiting for public housing lengthens, ever greater numbers of investment properties lie empty — it would look as if something has to give.The government has ruled out restrictions on non-resident property purchases or adjusting the peg. The official line is the peg cannot be adjusted until the yuan is convertible.