Pity the Hong Kong authorities. No one is quite as trapped between the conflicting forces of China’s slowdown and the expected US interest rate rise as a territory with its future tied to China and its currency pegged to the US dollar.
Add in surging demand for Hong Kong dollars triggered by record turnover in the city’s stock market and inevitably questions arise about the suitability, and the sustainability, of the tight 32-year-old currency peg. Last week, the Hong Kong Monetary Authority intervened in the markets to maintain the peg for the first time since last August. Yesterday, Norman Chan, HKMA chief executive, said the stock market rally produced $4.4bn of inflows last week. By comparison, the HKMA spent about $1.3bn in total last August on its market actions.
The case against a dollar peg is growing. It is not hard to argue that easy US monetary policy has produced bubbles in Hong Kong, most notably in property. Overall, the ratio of credit to gross domestic product has roughly doubled since the Federal Reserve’s quantitative easing began.