Author: Jiang Chao
1. After Hong Kong raised interest rates, the Hong Kong dollar depreciated continuously.
As we all know, Hong Kong, China adopts a linked exchange rate system, which is a fixed exchange rate system, that is, the exchange rate is pegged to a certain foreign currency and exchanged in a fixed proportion. While the Hong Kong dollar is closely pegged to the US dollar, how exactly is it pegged? On the one hand,In Hong Kong, US dollars are used as endorsements when issuing Hong Kong dollars. There are three note-issuing banks in Hong Kong, namely, HSBC, Standard Chartered Bank and Bank of China Ltd.. The note-issuing banks are required to deposit US $1 with the Hong Kong Monetary Authority for every HK $7.80 issued, and US $1 can be recovered from the HKMA for each HK $7.8 refund. At the same time, the HKMA can also issue coins and 10-yuan notes on its own, which will also be exchanged with the agency bank at the exchange rate of 7.8 at the same time.
On the other handIn order to ensure the stability of the Hong Kong dollar exchange rate, the HKMA undertakes to buy US dollars (strong-side convertibility undertaking) from licensed banks when the exchange rate reaches HK $7.75 to US $1, sell US dollars (weak-side convertibility undertaking) to licensed banks when the exchange rate reaches HK $7.85 to US $1, and can operate as necessary when the exchange rate reaches between 7.75 and 7.85.
The linked exchange rate system can ensure the stability of the exchange rate of the Hong Kong dollar, but it also leads to the complete loss of the independence of Hong Kong's monetary policy.Hong Kong is a small and open economy where capital can flow freely. In order to maintain the stability of the exchange rate, Hong Kong's monetary policy can only follow the actions of the Federal Reserve. When the Federal Reserve raises interest rates, Hong Kong will often face the pressure of capital outflow and the devaluation of the Hong Kong dollar. When the Federal Reserve cuts interest rates, Hong Kong will face the pressure of capital inflows and the appreciation of the Hong Kong dollar. Therefore, according to the official website of the Hong Kong Monetary Authority, Hong Kong's monetary policy has only one goal, that is, monetary stability, that is, to ensure the stability of the exchange rate of the Hong Kong dollar against the US dollar. Over the past 20 years or so, after every interest rate increase or cut by the Federal Reserve, the Hong Kong Monetary Authority has almost always followed suit. Hong Kong has completely lost the independence of monetary policy.
Although the HKMA has raised interest rates three times along with the Federal Reserve since the end of last year, the Hong Kong dollar has continued to depreciate against the US dollar.Since the Fed started this round of interest rate hikes at the end of 2015, Hong Kong has raised the discount window base rate by the same amount at the same time after the Fed raised interest rates four times. Hong Kong's base rate has been raised from a historic low of 0.5% to the current 1.5%. However, the Hong Kong dollar has continued to depreciate against the US dollar this year, with the exchange rate of the US dollar against the Hong Kong dollar at 7.76 at the beginning of 2017 and has exceeded 7.81 since July 2017. As the US dollar index has continued to weaken since the beginning of the year, the Hong Kong dollar has depreciated even more in the past six months from the perspective of a basket of currencies.
2. Direct cause: the spread with the United States has widened!
From a fundamental point of view, the economic situation of Hong Kong does not support a substantial devaluation of the Hong Kong dollar.Benefiting from the short-term recovery of the global economy, Hong Kong's economy has continued to improve since 2016, with GDP growth reaching 4.3 per cent in the first quarter of 2017 compared with the same period last year. In May 17, the unemployment rate in Hong Kong remained at around 3.2%, while the inflation rate was in a moderate range of 2%. On the whole, apart from the risk of a correction in asset prices caused by the continuous rise in Hong Kong property prices and the Hang Seng Index in the past two years, the Hong Kong economy is doing well and does not support the recent changes in the Hong Kong dollar.
The main reason for the devaluation is the widening spread between the US and Hong Kong markets.From the perspective of historical data, the exchange rate trend of the Hong Kong dollar against the US dollar is highly related to the interest rate spread between the United States and Hong Kong. From the perspective of interest rate parity, as capital can flow freely in Hong Kong, when the US dollar interest rate is higher than the Hong Kong dollar interest rate, the arbitrage fund can borrow Hong Kong dollars into US dollars for a higher return, and the depreciation pressure of the Hong Kong dollar increases; when the US dollar interest rate is lower than the Hong Kong dollar interest rate, arbitrage funds can be borrowed in US dollars and converted into Hong Kong dollars, and the Hong Kong dollar may appreciate.Since the beginning of the year1Libor with a term of six monthsDollar interest rate and HiborThe gap between Hong Kong dollar interest rates from less than 10 BPContinues to expand to the current proximity to 80BPIs the main reason for the depreciation of the Hong Kong dollar against the us dollar
The first reason for the widening interest rate gap between the United States and Hong Kong is that interest rates in the Hong Kong market are hovering low.The loose monetary policy implemented by central banks after the crisis led to a flood of global liquidity and large inflows of capital contributed to the rising size of Hong Kong's monetary base. The aggregate balance, the base currency that measures Hong Kong's interbank liquidity, has risen nearly 200-fold from HK $1.3 billion before the crisis to HK $259.5 billion now. The loose liquidity environment keeps Hibor interest rates at a low level.
On the demand side, Hong Kong's real estate regulation and control policy has suppressed the demand for housing loans to a certain extent since the beginning of the year.In the face of the rapid rise in house prices in Hong Kong, Hong Kong launched a new home purchase policy in November 2016, raising the stamp duty on the purchase of second homes to 15%. Then, in May this year, the HKMA introduced a new policy to restrict bank loans to property developers. The share of housing mortgage loans in Hong Kong has fallen from more than 14 per cent last year to nearly 13 per cent today.
The expected decline in the devaluation of the renminbi has also reduced demand for the Hong Kong dollar.Due to the strict peg between the Hong Kong dollar and the US dollar, coupled with the protection of the Hong Kong dollar fund, to some extent, the difference between the Hong Kong dollar and the US dollar is not too great. When the RMB is expected to depreciate, residents and enterprises will tend to exchange RMB for Hong Kong dollars to preserve their value, pushing up the demand for the Hong Kong dollar. The recent devaluation of the renminbi is expected to slow, the exchange rate of the renminbi against the Hong Kong dollar is still slightly higher than at the beginning of 2017, and the demand for exchange for the Hong Kong dollar will also decline.
The second reason for the widening spread is that the US dollar interest rate rose after the US interest rate hike, widening the gap with the Hong Kong dollar interest rate.Since the Fed began its current rate-raising cycle in December 2015, US market interest rates have been closely following the Fed's policy rate, the federal funds rate, and the gap between the one-month Libor dollar rate and the Fed's benchmark interest rate has remained within 0.2 per cent. By contrast, market interest rates in Hong Kong have not risen at the same time as policy rates. Although the benchmark interest rate of the HKMA discount window has been raised along with the US policy interest rate, the rise of the Hibor interest rate is very limited, and the gap between the Hibor and the discount window base interest rate has gradually widened after several interest rate increases.
3. Is Hong Kong adding "fake" interest rates?
Us dollar interest rates rose immediately after the Fed raised interest rates, while Hong Kong dollar interest rates remained unchanged after Hong Kong raised interest rates, which is the deep-seated reason for the depreciation of the Hong Kong dollar against the US dollar. Why did this happen? We need to introduce the differences in monetary policy between the United States and Hong Kong.
The Fed effectively controls the dollar market interest rate through the policy interest rate range. Before the subprime crisis,The main tool of monetary policy in the United States is the federal funds rate (the interest rate on lending reserves between deposit institutions). The Federal Reserve ensures that the federal funds rate reaches the target level through OMO operations.But08Years laterThe base money has increased greatly, the excess reserves of institutions have soared, and the amount of OMO operation of the Federal Reserve appears to be so small that it is difficult to affect the federal funds rate.
In order to strengthen its influence on market interest rates, the Federal Reserve has introduced the interest rate on reserves (IOR).) and overnight reverse repurchase (ON RRP)) tools.It should be noted that the overnight reverse repurchase tool of the Federal Reserve is different from that of China. The reverse repurchase operation of the Central Bank of China is that the central bank lends money to financial institutions, while the Federal Reserve's overnight reverse repurchase tool is that financial institutions lend money to the Federal Reserve. Overnight reverse repurchase tool has become a kind of "product" for financial institutions to earn interest on investment. We can see that the current target interest rate announced by the Fed is a range, and the lower limit of the range is the interest rate of ON RRP, the upper limit of the range is the interest rate on reserves, and the market interest rate of federal funds will fall within this range.
The principle of no arbitrage determines that the market interest rate will adjust rapidly with the range set by the Fed, because if the market interest rate is below the lower limit of the range, financial institutions can fully integrate funds in accordance with the market interest rate. the money is then lent to the Fed through overnight reverse repos to earn the difference. The existence of this arbitrage mechanism makes that as soon as the Federal Reserve raises the ON RRP interest rate, the market interest rate will immediately rise above the new ON RRP interest rate, and the arbitrage opportunity will disappear. Therefore, by introducing the interval target interest rate mechanism, the Fed has regained its control over the market interest rate.
The base interest rate in Hong Kong is the discount window interest rate, which has a very limited impact on market interest rates.The discount window interest rate is the lending rate at which banks borrow money from the HKMA. The main function of the discount window is to provide liquidity support to financial institutions when interbank funds are tight. However, if there is ample liquidity in the market and the market interest rate is lower than the discount rate, financial institutions can borrow money from the market without having to borrow "high price" money from the HKMA. At present, the discount rate of the HKMA is 1.5%, while the short-term interest rate in the market is generally less than 0.5%, so financial institutions generally do not go to the HKMA to borrow money. At this time, it is useless for the HKMA to raise the discount rate.Therefore, from this point of view, Hong Kong is really adding "false" interest!
In fact, the Federal Reserve also has a discount rate, and the Fed will raise the discount rate accordingly every time it raises interest rates. at present, the Fed's discount rate is already at 1.75%.But the market interest rate is only 1.2%.So it is useless for the Fed to raise the discount rate no matter how much it does. What really causes the market interest rate to rise is the upper and lower limit of the target interest rate set by the Fed.
4. In the short term, it is not appropriate to over-empty the Hong Kong dollar!
We believe that at the current exchange rate level, it is no longer appropriate to unduly short the Hong Kong dollar. First, the spontaneous mechanism of the market will play a role.At the current interest rate level, there will be capital outflow pressure, the exchange rate of the Hong Kong dollar will gradually weaken to near the convertibility rate, the HKMA will buy Hong Kong dollars from the banks, put in US dollars, and the base currency of the Hong Kong dollar will shrink. Interest rates will gradually rise (interest rates have been rising recently), and the exchange rate will gradually stabilize. As a matter of fact, even if the Hong Kong dollar does not depreciate to 7.85 against the US dollar, the HKMA may withdraw the Hong Kong dollar and release the US dollar as needed. However, this kind of market spontaneous mechanism is relatively slow and takes a long time.
Second, the dollar index is still weak.As the overall US economy weakens, Trump's new deal is hard to materialize, and the European economy is better and more likely to withdraw from easing, the dollar index as a whole was weak in the first half of the year, falling from more than 103 at the beginning of the year to less than 95% now. The reason why the depreciation of the Hong Kong dollar against the US dollar has lasted for half a year is also because the US dollar is not strong enough and the depreciation rate of the Hong Kong dollar is too slow to trigger the HKMA's mechanism to withdraw the Hong Kong dollar and release the US dollar. For example, at the beginning of 16 years, the Hong Kong dollar depreciated rapidly to 7.82, the HKMA decisively put in US dollars, and the exchange rate of the Hong Kong dollar quickly returned to normal.So in a sense, the reason why the Hong Kong dollar has continued to depreciate since the beginning of the year is that the depreciation pressure is not great enough.
Third, Hong Kong's fundamentals do not support the continued devaluation of the Hong Kong dollar.As we mentioned earlier, China's economy has rebounded sharply since last year, the global economy and trade have recovered, and the Hong Kong economy has steadily risen. In the first quarter of this year, GDP growth reached a high of 4.3% compared with the same period last year. Comparatively speaking, the overall US economy was weak in the first half of this year, and the ability to raise interest rates further was also limited. Therefore, the fundamentals do not support the continued devaluation of the Hong Kong dollar.