Hong Kong Struggles To Balance East And West

Hong Kong’s currency and financial stability are not under immediate threat.

Hong Kong has earned some unenviable headlines in the last four years, from unrest triggered by the National Security Law to the city’s stringent COVID control measures. The bad news continues to pile on for the city, most recently in currency markets.

Pegged in a band of HK$7.75–7.85 per U.S. dollar, the Hong Kong dollar (HK$) is generally a stable currency. But ever since the U.S. Federal Reserve started hiking rates in March 2022 to tame inflation, the local currency has been trading at the weak end of its target band. This has raised renewed concerns over the dollar peg and its economic implications.

A stable currency is considered an anchor for financial stability in an open economy like Hong Kong, where trade and logistics are key drivers. The Hong Kong dollar has a predictable value and is easily convertible, contributing to the city’s dominance as a global financial hub.

Hong Kong’s monetary policy has been run in lockstep with the Fed for four decades. This requires the Hong Kong Monetary Authority (HKMA), the city’s central bank, to intervene in the currency markets by selling or buying every time the domestic currency falls or rises beyond the band.

The HKMA has bought about HK$47 billion to support the local currency this year, after having deployed over HK$240 billion in 2022. In total, over 40 interventions have been required to keep the currency at its peak. The aggregate balance (a measure of liquidity in the banking system) has tumbled from HK$320 billion to below HK$50 billion in the past year, the lowest level since the 2008 financial crisis.