Thursday, February 10, 2011

HKD Weakens as Refuge for Capitals Fades

Perhaps we have enough discussions about renminbi (RMB) recently. Today we want to switch our focus to the weakening Hong Kong Dollar (HKD) as refuge for capitals fades.

Although Hong Kong is such a small place in our planet, HKD is the 9th most traded currency in the world, according to the Wikipedia.

For over 20 years, a linked exchange rate system has been maintained by the Hong Kong Monetary Authority (HKMA) to peg HKD with USD. In order to prevent HKD from being used as a proxy for speculative bets on renminbi (RMB) revaluation, HKMA came up to impose a ceiling on HKD appreciation since May 2005, undertaking to buy USD/HKD at an exchange rate of 7.75. The official HKD convertibility zone has then been widened, with its USD/HKD upper and lower guaranteed limits at 7.75 and 7.85 respectively.

On October 2008, the Hong Kong Financial Secretary John Tsang announced a Full Deposit Protection (FDP) Scheme to support confidence in the Hong Kong banking system amidst the global financial tsunami. It included the use of the Hong Kong Exchange Fund to guarantee the repayment of all customer deposits held with all authorized institutions in Hong Kong including restricted-license banks and deposit-taking companies as well as licensed banks.

This full protection applied to both HKD and foreign-currency deposits with authorized institutions in Hong Kong, including those held with Hong Kong branches of overseas institutions. Before that the maximum Hong Kong deposit protection was only HKD 100K per depositor. The FDP remained in force until the end of 2010 and, as expected, it did not ever need to be triggered within the period from October 2008 to December 2010.

In April 2010, following the completion of a review of Hong Kong Deposit Protection Scheme, an amendment bill was published to include changing the protection limit to maximum HKD 500K per depositor after expiry of the Full Deposit Protection at the end of 2010.

In fact, not just the deposit protection limit is reduced. If you look into a bit more details, you may also notice that deposits held with restricted-license banks and deposit-taking companies are now no longer protected by the amended scheme.

In addition, even your bank is a member of the amended scheme, certain types of deposit are compulsorily not eligible for protection. Those ineligible deposits include: time deposits with a maturity longer than 5 years, offshore time or swap deposits, bearer form deposits (e.g.: bearer certificates of deposit) as well as structured deposits (e.g.: foreign currency linked and equity linked deposits). [Source: Hong Kong Deposit Protection Board]

Obviously the market has been smart enough to realize that it is more than a negligible amendment. We see the FDP expiry has started to weight down the HKD, as the USD/HKD exchange rate already moved away from the previous strong-side 7.75 to a weaker level 7.7736 at the close of end-2010.

It signals that capitals already started flowing out from Hong Kong before the end of 2010. After all, the previous HKD strength was significantly attribute to its safe heaven status in Asia especially during the financial tsunami and also the fast-growing activities of Initial Public Offering (IPO).

By the way, Hong Kong has already maintained its ranking as the world's largest IPO market in fund-raising size for 2 consecutive years in a row since 2009. We expect HKD will continue to consolidate slowly towards its weaker-side, at least to a level beyond 7.8, as the expiry of Full Deposit Protection reduces attractiveness of HKD as a refuge for capitals.

In 2011 there will also be lacking of sizeable IPO giants comparable to the listings of the Agricultural Bank of China (stock code: and the AIA Group (Asian life insurance operations of AIG; stock code: in the previous year.

This process of weakening HKD, however, may also exert pressure to the Hong Kong stock market in the year 2011.

A few weeks after the FDP expiry, HKD has continued to recede against USD and moved further down to 7.7868 as of 8 February 2011.

Forex USD/HKD chart
Current USD/HKD Chart

We, Mr China, however believe that it should be a healthy move. The market eventually comes back to reflect the actual demands of HKD, and no longer hotly considers HKD as a refuge for capitals.

At the end of the day, it can help reducing the risk of asset bubbles in Hong Kong.

Related article(s):
Special stamp duty signals the end of high-land-price policy in HK.


Jean Paul said...

It seems the weakening of HKD should be the reverse of the previous massive capital inflows.

By the way, how do you see the longer-term outlook for HKD? The outlook for the U.S. credit rating has just been downgraded to negative by S&P. Do you think this will impact the outlook for Hong Kong rating?

Mr China said...


You have a good question here. We see this as a medium-to-longer-term trend for HKD because the amended deposit scheme should be a change in fundamental.

As per the U.S. downgrade issue, we are, however, not the Standard & Poor's. If we were, we might already downgraded the U.S. probably 3 years ago. If we were, we would rather believe Hong Kong's rating should be more dependent on the PRC instead of the U.S. in the longer-term.

Post a Comment

Popular Articles in this Week (Top 10)

Not What You Want?

Try More Search in Our Website Here...