Hong Kong interbank interest rates rose across all tenors on Friday. The overnight interbank offered rate rising the most, to the highest in four weeks. Overnight Hong Kong interbank offered rates (Hibor) jumped 63.5 basis points (bps) to 4.88%. One-week Hibor rose 62 bps to 4.92% its highest in nearly 16 years. The day before the Hong Kong Monetary Authority (HKMA), Hong Kong’s de-facto central bank, left its base interest rate charged through its overnight discount window unchanged at 5.50 per cent, tracking action by the U.S. Federal Reserve.
The latest HKMA move kept borrowing costs in the city to the highest level since January 2008. Hong Kong interbank offered rate (Hibor) continues to rise. One-month Hibor, the benchmark used in pricing residential mortgage loans, rose 21.8 bps to 4.97%, the highest since December 2022.
Peak Season for Dividend Payments
Hong Kong listed companies’ demand for Hong Kong dollars for dividend payments peaks in the three months to August and this could send interbank rates higher, Hong Kong Monetary Authority (HKMA) Chief Executive Eddie Yue said in an article published on the HKMA website on Wednesday.
The peak season for dividend payments is usually in June to August. Such funding demand sends the Hong Kong dollar exchange rate higher Yue said. He added such seasonal factors will continue to influence interbank rates in the coming weeks or month.
“The possibility that HKD interbank rates will catch up with, or even overshoot, their USD counterparts on certain days cannot be ruled out,” said Yue.
The Hong Kong dollar was up 30 pips at 7.8308 per dollar and the highest in two weeks. The Hong Kong overnight interbank offered rate reversed two straight days of decline and rose to 3.88 per cent, the highest since May 30, after having peaked at nearly 5 per cent on May 19 at a nearly 16-year high.
Hong Kong raises rates in line with the Fed due to the Hong Kong Dollar’s peg to the US Dollar. The weakness in the HKD forced the bank to deplete banking system cash to 15-year lows.
Hong Kong’s monetary policy moves in lock-step with the United States as the city’s currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar.
“Rate hikes in the U.S. will not affect the financial and monetary stability of Hong Kong, …. The market has continued to operate in a smooth and orderly manner and the total deposits in the banking system in Hong Kong have also remained stable.”
Eddie Yue, Chief Executive of the HKMA, told reporters last month.
Defending the Peg
Last month the HKMA move came after another round of intervention by the HKMA to defend the Hong Kong dollar bumping into the weakest end of the peg at 7.85.
Persistent intervention by the HKMA has failed to put a floor under the Hong Kong dollar and interbank rates, as investment inflows from mainland China and a weak domestic economy have sapped loan demand.
Hong Kong’s aggregate balance, a gauge of liquidity levels in the banking system, has declined rapidly over the past year, and is down more than 90% from its peak in 2021. It fell to just 44.76 billion Hong Kong dollars ($5.7 billion) by Monday ahead of this meeting, the lowest level since November 2008.
Since last May, the currency has touched 7.85, the weak end of the band over 40 times, prompting the HKMA to buy nearly 289 billion Hong Kong dollars ($37 billion) from banks to shore up its value, according to statistics released by the authority early last month.
The slump started in early 2021, when there was a decline in the flow of investments from mainland China into Hong Kong stocks as Beijing cracked down on the country’s internet giants and education companies, many of which are listed in the city. In the last 18 months, US interest rates have been the main driver for the pressure on Hong Kong’s currency. A widening of the interest rate gap between the Hong Kong dollar and U.S. dollar incentivized carry trades and weakened the Hong Kong dollar, leading to the over 40 rounds of intervention by the HKMA since the U.S. Federal Reserve began hiking rates in March 2022 up to May.
John Greenwood who is credited as the chief architect of Hong Kong’s dollar peg after an article he wrote in 1983 provided the basis for the system, said ditching the peg would hurt the city’s role as an international financial center.
“A large proportion of Asia’s trade and capital transactions are still denominated in US dollars,” he told CNN. “Pegging the Hong Kong dollar to the US dollar encourages such transactions to be carried out in Hong Kong and under Hong Kong law, even if neither party is based in Hong Kong.”On converting to the Yuan he said; “Hong Kong would not be able to operate a system that was fully and freely convertible to the mainland [currency] without undermining some of China’s financial controls,” Greenwood said.
Hong Kong is already struggling after Beijing’s crackdown on technology and private education firms back in July, and then the debt crisis at mainland Chinese developer China Evergrande Group. In an already precarious situation with the Chinese property market implosion higher rates have helped drive Hong Kong’s property market into a rare downturn, prices of residential properties and rent for office space also collapsed.
The HKMA said Hong Kong interbank rates, which have been rising over the past few months, will likely rise further with the Fed’s latest rate hike, and that people should therefore carefully assess the interest rate risk with mortgages and other borrowing decisions.
Hong Kong’s biggest banks such as HSBC Holdings Plc and Standard Chartered Plc are expected to keep prime rates unchanged with the HKMA move.
The Fed’s aggressive monetary tightening this year has raised concerns about Hong Kong’s linked exchange rate system, including its sustainability and relevance. Just last month, American investor Bill Ackman who founded hedge fund Pershing Square Capital Management, said that the mechanism no longer made sense for the city. He placed a monstrous bet for it to fail shorting the Hong Kong dollar.
The Hong Kong Monetary Authority however has said that it does not need or intend to change the system, citing strong buffers and deep liquidity in the banking system.
From The TradersCommunity Research Desk