Hong Kong steps in to weaken the local dollar, as hot money inflows defy doomsday talk of capital flight after China's security law

Hong Kong's monetary authority stepped into the financial markets to weaken the local currency on Tuesday, the 24th time this year it has had to rein in the effects of hot money and its first intervention since last week's enactment of China's national security law.

The city's de facto central bank sold HK$15.31 billion (US$1.98 billion) of Hong Kong dollars on three occasions on Monday and Tuesday, buying the equivalent amount in US dollars to weaken the local currency's exchange rate below 7.7500 per dollar, according to data released by the Hong Kong Monetary Authority (HKMA).

The episode shows how the inflow of money into Hong Kong continues to defy doomsday speculation of capital flight, as global investors position themselves for more than 20 initial public offerings (IPOs) in the city this month. Some high-net-worth individuals are also switching out of their US-dollar holdings and assets to seek shelter in other currencies including the Hong Kong dollar, as the White House considers imposing financial sanctions on Hong Kong's banks and individuals in retaliation for the law.

"The IPO market remains piping hot, which continues to suck in hot money" in search of higher returns, forcing the HKMA to continue its interventions, said Bruce Yam, currency strategist at Everbright Sun Hung Kai Company Limited in Hong Kong. "Some of the wealthy people in town are also moving their assets away from the US", in reaction to the rising tension between the US and China over Hong Kong, he said.

The Hong Kong dollar has been pegged at 7.8 to the US dollar since 1983, when the city was still a British colony. Since 2005, a trading band has been established to allow the local currency 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 accordingly to keep the exchange rate within the trading band to maintain the currency peg.

The monetary authority has sold HK$72.94 billion of the local currency in 24 interventions this year since April, raising the HKMA's aggregate balance " which shows the banking sector's liquidity " to HK$146.93 billion. The ample liquidity in the banking system has lowered the cost of money, causing the one-month interbank offered rate, or Hibor, to drop to about 0.4 per cent from 2 per cent in the first quarter.

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The lower Hibor, which is linked to mortgage loans and most of the city's corporate borrowings, would provide relief to households and businesses, giving them a helping hand to recover from Hong Kong's worst recession on record. Hong Kong's economy contracted 8.9 per cent in the first quarter, its worst slump since 1974.

Hong Kong, the world's top destination for fundraising in seven of the past 11 years, is preparing for another bumper month of IPOs in July. Successful secondary listings by NetEase and JD.com last month helped the two companies raise more than US$6 billion between them, helping Hong Kong to catch up with New York and Shanghai in the global race for pole position. More than 20 new issuers will have completed their listings on the Hong Kong bourse during the first two weeks of this month, according to data by the Hong Kong stock exchange.

These include the US$1.8 billion being sought by China Bohai Bank, and several biotechnology and health care-related Chinese issuers. Cancer therapy developer Immunotech Biopharm launched its IPO last week to raise up to US$141 million, while ophthalmic therapy provider OcuMension Therapeutics is seeking to raise up to US$199 million. Both companies are slated to list on the main board this Friday.

Others that could potentially complete their IPO and listing this month include JHBP (CY) Holdings, an oncology and autoimmune drug maker backed by Hillhouse Capital and is reportedly raising US$300 million. Mobile game developer Archosaur Games plans to raise up to US$278.7 million.

Hong Kong benchmark Hang Seng Index rose almost 1,000 points on Monday with a turnover at HK$251.29 billion, the most in two years.

Meanwhile, foreign appetite for mainland China-traded stocks has been increasing so fast that cross-border trading in a number of companies through the Stock Connect schemes has either been suspended, or will be suspended soon, as limits on overseas ownership are reached.

Another source of optimism is the HK$10,000 in cash handout that every permanent resident is due to receive, starting on Monday, as the government with one of the world's largest currency reserves pries loose HK$55 billion to stimulate spending. Some residents have indicated that they would plough the money into the stock market.

"The sentiment is extremely strong as the mainland market rallied to the highest in recent years," said Tom Chan Pak-lam, chairman of Hong Kong Institute of Securities Dealers. "It is not going to cool down any time soon, and we are going to see more money flowing in to bet on the stock market."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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