Hong Kong’s financial war chest is big enough to withstand

Hong Kong’s financial war chest is big enough to withstand

Hong Kong’s financial war chest is big enough to withstand

Small Seller Not successful – Hong Kong Stock

According to Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, the city’s existing Central Bank, commented that small seller has not been fruitful in combating the Hong Kong stock and the expectations of the markets as they performed in the Asian financial crisis.  This is owing to the financial market is quite huge and beyond their capacity to cope up.

Hong Kong’s financial war
Hong Kong’s financial war

0In 1998, the small seller attempted to compel the government to delink the local peg of currency to the US dollar. This was done by confronting the futures, stocks as well as the currency markets. They were successful in enforcing an increase in interest rates letting the stocks and future to dip down. However, they were unsuccessful to bend the government in delinking the currency to the US dollar.  On the contrary, the government interfered in strengthening the stock market.    

Asian Financial Crisis

Chan had commented recently on the sidelines after the Treasury Markets Association’s annual summit that “there has been some normal short sell position, but the size is not substantial.  We have not seen big short sell positions, opening in the Hong Kong dollar recently”. He further added that “the financial market in Hong Kong is much bigger nowadays than at the time of the Asia financial crisis in 1998.

The short sellers who want to attack the local currency would find that they would need much more bullets to carry out the attacks, which would be too expensive for them to do so.  The public as such does not need to worry about the short seller’s attack to the peg as they would not be able to repeat what the short sellers were doing during the Asian financial crisis” 

Government Intervention 

The US dollar and Hong Kong dollar had been related since 1983 providing stability to the currency together with the economy of the city.  Presently it is permitted to travel within a trading band range of 7.7500 and 7.8500. Currency speculators had at the time of the Asian financial crisis attacked the peg by selling index futures, stocks, and Hong Kong dollars in currency markets, which resulted in a sharp increase in interest rates. 

This led the one month Hong Kong dollar interest rate to rise by 20 percent. This interest rate point weighed heavily on the Hong Kong stock market which made the government to interfere by selecting the Exchange Fund over expenses of HK$ 118 billion in order to purchase blue chips. The shares thereafter were sold the following year by the government thereby reaping a good profit.  

Forecasting Surge in Capital Flight from Hong Kong 

However, some of the anti-government disapprovals resulted in some hedge fund managers like Hayman Capital Management’s Kyle Bass, Trium Capital’s Thomas Roderick and Crescat Capital’s Kevin Smith in forecasting a surge in capital flight from Hong Kong. This would compel the city to plummet its currency peg with the US dollar. But Chan was not in agreement with this understanding.

After the first main demonstration, the Exchange Fund, the war chest of the local reserve to safeguard the currency from the short seller, remained at HK$ 4.138 trillion towards the end of July or a couple of months which happens to be 4.5 times increase than the level towards the end of 1998 when it was HK$921.4 billion.  From June towards the end of August, the Hang Seng Index had fallen by 5%. However, it increased by 6.3% in the recent two weeks of this month mainly owing to enhanced sentiment on trade as well as the initiative taken by city chief Carrie Lam Cheng Yuet-Ngor in conceding to one protestor demand. He formally withdrew an extremely unacceptable extradition bill which had initially ignited the demonstration.  

Dip in Property Prices 

The Hang Seng Index, in contrast, had decreased over 50% during the Asia financial crisis prior to the government’s intervention. Chan had commented’ “We have not seen any major capital overflow in recent months.  There are some clients asking about opening accounts overseas, but the private banks have not seen clients ask to transfer a massive amount of money out of Hong Kong. The local deposit numbers are holding up well”. He also brought about awareness that the Hong Kong dollar had gained strength in contrast to the US dollar recently. 

This is because the improved market sentiment has resulted in some mega initial public offerings to begin in Hong Kong. IPO ambitions had been invigorated recently by logistic giant ESR Cayman and brewery company Budweiser who had canceled their aids in June and July individually for shared US$11.04 billion. Though the property prices had dipped by 3% owing to the protest, Chan stated that it would be too early to relax mortgage policies which are supposed to settle down the heat in the real estate market. Chan added, “We will closely monitor the market.  Only if we confirm there is a downward cycle of the property market we would be able to relax the mortgage policies. Owing to the conflict, Credit Rating agency Fitch had downgraded the rating for Hong Kong.

Gokulanand Thiruvenkatam

Leave a Reply

%d bloggers like this: