HKMA battling peg pressure: US report

Staff reporter

The ability of the Hong Kong Monetary Authority to maintain the Hong Kong dollar's peg to the US dollar is under pressure, draining Hong Kong's fiscal capacity, a report to the US Congress shows.

The 741-page annual report was released by the US-China Economic and Security Review Commission two days before US President Joe Biden met Chinese leader Xi Jinping in San Francisco.

The Commission said there has been a growing weakness in the local currency's peg to the greenback as it has touched the weak end of its managed value window more than 40 times from May 2022 to June 2023 amid higher US interest rates.

As the HKMA purchased Hong Kong dollars aggressively to defend the currency peg, the aggregate balance, a key gauge of liquidity in the banking system, has dropped precipitously over the past 12 months and has fallen 90 percent from its peak in 2021, it noted. In June 2023, Hong Kong's aggregate balance fell to HK$44.76 billion, the lowest liquidity level since the global financial crisis in 2008, according to the report.

The stress on the Hong Kong dollar has raised questions for Hong Kong's financial leaders on the sustainability of the currency peg, the report said.

The HKMA holds the exchange rate of the Hong Kong dollar pegged at a range between 7.75 and 7.85 per US dollar. The Hong Kong government has maintained the peg since 1983, a feature that has helped stabilize local interest rates and the value of the Hong Kong dollar while also maintaining easy convertibility of the local currency.

But the commission argues that the recent volatility has prompted speculation of switching to offshore yuan that circulates outside of the mainland and that is less subject to mainland exchange rate controls, the report said.

Such a move would harm Hong Kong's financial center status due to the offshore yuan's limited circulation, the report added.

Hong Kong officials have repeatedly said that the peg worked well and the city has abundant reserves to maintain it, with HKMA chief executive Eddie Yue Wai-man saying last month that there is no intention and no need to change the peg.