Chan wants a grip on rates

Editorial | Mary Ma 12 Mar 2018

It's rather out of character for Hong Kong Monetary Authority chief executive Norman Chan Tak-lam to hit a nerve over the local currency. But he did just that last week with his official column, Insight.

If people are getting impatient over their wait for Hong Kong interest rates to increase to help dampen soaring property prices - especially after the United States boosted its rates five times - local officials are becoming restless too.

Even worse, our interest rates earlier headed in the opposite direction: down. Now that's alarming for policymakers.

That sense of restlessness is clear in Chan's comments. In a questions-and-answers format, Chan highlighted several points.

One, a weakening Hong Kong dollar doesn't cause concern, and the HKMA will act when it falls to 7.85 against the greenback.

Then, he said the issue of extra Exchange Fund bills last year had little to do with the weakening of the Hong Kong dollar, and he urged the market not to take it wrongly that the authority doesn't want the HKD to weaken.

The rest of his comments dwelled on the robustness of the banking system, saying it can handle huge capital outflows.

The English translation of the headline reads "Stay calm on the weakening of the Hong Kong dollar." The Chinese original is more punchy, saying "there's nothing to fear in a weakening HKD."

That's a rather unconventional statement from a central banker like Chan. His message can't be clearer - he wants the SAR's currency to weaken. But why does the HKMA chief want a weaker Hong Kong dollar? Indeed, his comments echoed what Financial Secretary Paul Chan Mo-po said recently that while US interest rates have risen five times, we simply don't follow suit.

It's hard to miss their concerns. When the administration wanted local interest rates to go up, it came down after the New Year instead. The impact was more than sarcasm for the authorities.

Normally, interest rates would have climbed to protect the dollar peg when the exchange rate was at 7.8. But in 2005, the peg mechanism was amended to mandate intervention when the exchange rate declines to 7.85.

The exchange rate fell to 7.836 the day before the Norman Chan updated his column. In other words, the HKMA would need a better reason to intervene to prop up the HKD - a process that will result in an increase in interest rates.

The authority did try last year. The issuance of a total of HK$80 billion worth of Exchange Fund bills in 2017 was believed to be aimed at draining excessive liquidity from the financial system, so as to create an environment for higher interest rates.

It failed to create an impact in view of the abundance of capital, thanks to the constant inflow of money from the north.

In theory, Norman Chan can again choose to issue Exchange Fund bills to absorb the money. But the last exercise may have shown it would be useless to do so.

Perhaps, he's pinning his hopes on getting a grip on interest rates via a new norm of a weak Hong Kong dollar. But will it work? Let's wait and see.

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