KUALA LUMPUR: The policy to keep the Hong Kong dollar pegged against the US dollar will remain although the Asian currencies have come under increasing pressure due to the volatility in the dollar.
Hong Kong chief executive Leung Chun-ying said that the policy of pegging the Hong Kong dollar to the US dollar has been operating well and he was not going to change it.
“Yes we had to sell Hong Kong dollars (in recent weeks) to maintain the peg but the amount deployed is quite small relative to the inflows. We have the capacity to handle it (the inflows of funds),” he told a group of reporters yesterday.
The Hong Kong dollar has been pegged to the US dollar when capital started to flow out prior to the handover of the special administrative region by the United Kingdom back to China in July 1997. In 2005 the policy makers committed to limit the currency’s decline to HK$7.85 per dollar and appreciation at HK7.75 per dollar.
According to reports last week, in the months of April the Hong Kong Monetary Authority intervened into the market to maintain the peg amidst rising demand for the Hong Kong dollar. The amount spent to buy up the US dollar in the month of April to maintain the peg was estimated at US$6.8bil.
Since the start of the year, at least two countries have dismantled their currency peg. In January this year, Switzerland did away with the Swiss francs being pegged to the euro. This came about due to the European Central Bank (ECB) undertaking a quantitative easing programme that caused the euro to go on a depreciating trend.
This sent huge amount of capital into the more stable francs, something that forced the government to lift the peg.
As for the Hong Kong dollar, the demand picked up largely due to two reasons. Investors sought the Hong Kong dollar to take up positions in under-valued China mainland stocks that are traded on the Shanghai-Hong Kong Stock Connect. The other reason is the appreciating yuan against the US dollar.
The yuan has appreciated against the US dollar on expectations of a recovery in China’s economy next year. Another reason is currency investors have now resigned to the fact that the Federal Reserve will only raise interest rates in the United States much happen in the year instead of the earlier prediction that it would happen in the first half.
This has caused the inflows of funds back into Asia, especially markets that are relatively undervalued such as China.
Leung expected the uncertainty towards the US dollar to continue for a few more months and that a decision to increase rates would not be an easy one.
“The uncertainty will hang around for a few months because the recovery in the US economy is patchy,” he said.
Leung’s bigger concern was the occurrences of single incidences in Europe such as sovereigns not meeting their obligations.
“The impact can be big … it could have a knock on effect because the world financial markets are al joined up,” said Leung.
The biggest concern in Europe is Greece that is running out of money and has debt obligations to meet. It has to pay the International Monetary Fund in May and to the ECB in July.
The situation is in a deadlock now as members of the European Union wants to see more reforms from Greece before they release financial aid of 7.2 billion euros.
On the Shanghai-Hong Kong Stock Connect that got off to a slow start, Leung said that volumes had started to pick up due to investors seeing a gap in valuations in stocks with exposure to mainland China.
The Shanghai-Hong Kong Stock Connect launched on Nov 17, 2014 allows investors, including foreigners, with accounts in Hong Kong brokerages to purchase certain class of shares listed on the Shanghai Stock Exchange through the local brokers. Conversely, investors in mainland China can purchase shares listed on the Hong Kong Exchange through their local brokers.
Initially, volume was low in the Shanghai-Hong Kong Stock Connect. However it has picked up significantly over the past one month making the Hong Kong Stock Exchange as one of the best performing in the region.
Leung said that they hoped to get the Shenzen-Hong Kong Stock Connect up and running in the second half of this year.
“This is all part of the efforts to make Hong Kong the global financial centre for China,” he said.
Investors wary of investing in mainland China have always looked to Hong Kong as the best alternative because it has the characteristics of the Western world with a huge gateway to China. Hong Kong practices an open financial system, a set of laws that is similar to the British system, has a large pool of English-speaking population and a deep talent pool especially in the area of finance.
“There are 7,600 companies overseas that has based their headquarters for China in Hong Kong. Among them are 16 from Malaysia. The big four accounting firms have their China office based in Hong Kong,” said Leung.
Apart from the language and the depth of talent, Hong Kong’s infrastructure is far better than that found in Beijing, Shanghai and Shenzen. Telecommunication systems are far superior while connectivity to the mainland is not a problem.
“There are numerous flights daily to various parts of mainland China. By land it is only 45 minutes to the boundary,” he said.
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