3 results of persistent capital inflows in Hong Kong

Find out what they are.

According to Barclays, persistent capital inflows coupled with slowing loan demand will lead to 1) lower lending rates; 2) falling loan to deposit ratio; and 3) lower margins.

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Rising capital inflows into the HKD has led to the Hong Kong Monetary Authority (HKMA) intervening four times since 19 Oct to defend the HKD/USD peg and the HKMA believes this trend will continue for some time. We reiterate our negative view on the Hong Kong banks.

HKMA intervenes four times this week to defend currency peg

Recent capital inflows after further quantitative easing in the US (QE3 announced on 13 Sept) has resulted in strong demand for HKD, resulting in the HKD trading on the strong side of the currency’s trading range of between 7.75 and 7.85 (HKD/USD).

Under the linked-exchange rate’s strong-side convertibility undertaking, the HKMA has intervened four times since 20 October, by selling HK$14.4bn (US$1.85bn) to licensed banks. The HKMA believes that net inflows into the HKD will continue for some time and will continue to defend the currency peg.

The last time the HKMA intervened was between Sep-08 and Dec-09 when the HKMA sold HK$650bn and the HKD hit the strong side of the currency trading range of 7.75. This is reflected in the aggregate balance and exchange fund papers outstanding of the HKMA. It is interesting to note that the pace of capital inflows after QE3 is much slower than under the first two rounds of QE when the impact was much more immediate.