Global capital flows and geopolitical risks are Hong Kong’s biggest challenges for the next few years, city’s de facto central banker says

·5-min read

Hong Kong will continue to see volatile ebbs and flows of capital in the foreseeable future, as rival geopolitical forces buffet its open economy, the city’s de facto central bank chief said in a rare interview.

“We have already seen some capital outflow from the Hong Kong dollar market after the [US] Federal Reserve raised interest rates,” said Eddie Yue Wai-man, chief executive of the Hong Kong Monetary Authority (HKMA). “The trend will continue, as we are just at the beginning of the interest rate rise cycle.”

Yue’s warning, delivered during a media interview last week ahead of the July 1 anniversary of Hong Kong’s handover to China’s sovereignty, underscored the unique position occupied by the world’s fourth-largest capital market, a quarter of a century since it ceased to be a British colony.

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Hong Kong is a special administrative region (SAR) of China, albeit one of only two such territories – the other is Macau – that maintain separate economic and administrative systems within the same country. Monetary policy has been conducted in sync with the US Federal Reserve ever since the Hong Kong dollar was pegged to the greenback in 1983, more than a decade before the city’s return to Chinese rule.

Hong Kong Monetary Authority (HKMA)'s chief executive officer Eddie Yue Wai-man at the HKMA’s office in Central on 10 June 2022. Photo: Xiaomei Chen
Hong Kong Monetary Authority (HKMA)'s chief executive officer Eddie Yue Wai-man at the HKMA’s office in Central on 10 June 2022. Photo: Xiaomei Chen

Yet China’s role is everywhere in Hong Kong, with China-domiciled companies making up more than 80 per cent of the US$5.6 trillion stock market’s capitalisation. The market’s value has grown eightfold since 1997, while bond issuance ballooned by 20 times to US$400 billion in 2021.

Hong Kong became directly caught up in the simmering tensions between mainland China and Washington in August of 2020 when Donald Trump’s administration placed sanctions on its leader and several other high-ranking officials in response to Beijing’s imposition of a sweeping national security law.

Though shrugged off by Chief Executive Carrie Lam Cheng Yuet-ngor as largely harmless, compliance officials said at the time that sanctioned individuals, and possibly their families, could find overseas bank accounts closed, credit cards cancelled and insurance coverage put on hold by financial institutions wary of running afoul of US regulators and losing access to the American financial system.

https://www.scmp.com/business/banking-finance/article/3097680/us-sancti…

As the de facto central bank, the HKMA sits on the world’s seventh-largest foreign-currency reserves, a financial war chest that quintupled over 25 years to US$460 billion at the end of May, more than what Germany and the UK held.

“Hong Kong can cope with these challenges as the local reserve and banking system has grown much stronger during the 25 years since the handover,” Yue said.

Hong Kong’s financial sector
Hong Kong’s financial sector

A trading band created after the Hong Kong dollar’s peg compels the HKMA to intervene in the market to buy or sell the local currency to stabilise it within the band. The monetary authority bought HK$17.85 billion of Hong Kong dollars in five interventions last month, as global investors sold the local currency to invest in high-yielding assets after the Fed raised interest rates in March and May.

“The spillover effect of the geopolitical tensions means we face a lot of market volatilities,” Yue said, reiterating that Hong Kong has no plan to change its currency peg. “These are the two major challenges facing Hong Kong in the next few years.”

More interest rate increases have been foreshadowed, as the US has signalled the likelihood of raising the Fed rate from zero in March to 3.75 per cent by the end of 2023, according to economists’ forecasts. The next rate increase is due this week on June 16..

The synchronised rate increases will raise Hong Kong’s base rate to about 4 per cent by the end of 2023, ANZ said.

To get ahead of the rising interest rates, some homebuyers have plunged into the market to snap up new flats.

Yue also does not have a plan to change mortgage policy. The HKMA has tightened residential mortgage policies by nine rounds since 2009 to cool down the overheating property market.

“We have not yet seen the trend of the property prices to go down so it is not yet the right timing to relax the residential mortgage policies,” he said.

“Hong Kong can cope with these challenges as the local reserve and banking system has grown much stronger during the 25 years since the handover,” Yue said.

More than two years of travel restrictions and draconian quarantine rules during the Covid-19 pandemic have deterred immigrants from filling the city’s talent shortage. All over the city, tens of thousands of jobs across all industries are waiting to be filled amid an exodus of expatriates and Hongkongers.

The HKMA was not immune, losing 7 per cent of its staff last year, compared with about 3 per cent in a typical, pre-pandemic year. The most serious shortage was in the staffing of fintech and green finance, Yue said.

“Talent shortage is not just a problem faced by Hong Kong’s financial sector, but it happens in overseas markets too,” Yue said. “When every firm is trying to develop its fintech, green finance and wealth management business, we face difficulties finding sufficient talents in these fields,” Yue said, adding the authority has worked with the sector to provide training.

Yue also believes the impact of Covid-19 will eventually pass while Hong Kong can still work as a connector between China and the world in the years ahead. The HKMA has invited global top bankers to attend a summit in Hong Kong in November.

“The Stock Connect and Bond Connect schemes have seen strong turnover since their launch, while the Wealth Management Connect has also been popular since its start last year,” he said. “The internationalisation of the yuan and the development of green finance will provide a lot of opportunities for Hong Kong in the coming years.”

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