Hot money flows into Hong Kong

01 point of view

Written by: Review Editor

2020-06-15 16:30

In recent months, the Hong Kong dollar has been strong against the US dollar. It has repeatedly touched strong guarantees in the past two weeks, and the HKMA has repeatedly sold the Hong Kong dollar exchange rate on the open market. The strong exchange rate of the Hong Kong dollar against the US dollar reflects that market funds are generally conducting "buy Hong Kong dollars with US dollars" transactions, generally suggesting that funds are flowing into Hong Kong. After the news of the Hong Kong version of the National Security Law came out, some people worried that the United States would sanction Hong Kong and affect the status of Hong Kong's international financial center. The United States threatened to stop recognizing the so-called special status of Hong Kong and cancel its treatment of the independent customs territory granted to Hong Kong, but the strong exchange rate reflects the fact that at least in the short term, the market does not think that this will affect investment in Hong Kong. In the longer term, the government should not forget the lessons after the 2008 financial tsunami. Although a large amount of capital flows into Hong Kong, although it will create a wealth effect, if the government does not have proper planning, it will only increase the disparity between the rich and the poor, speculate on the skyrocketing property market, and cause more socio-economic problems.

Last week, the Hong Kong exchange rate repeatedly touched strong guarantees (that is, the US dollar against the Hong Kong dollar was lower than 1:7.75), causing the HKMA to sell the Hong Kong dollar in the open market at least five times in the last two weeks to maintain the linked exchange rate. In total, it sold nearly 20 billion Hong Kong dollars. The strong Hong Kong dollar reflects the generally strong demand for the Hong Kong dollar in the market, with funds flowing into Hong Kong. According to the Hong Kong Monetary Authority, the Hong Kong bank balance has increased from about RMB 60.6 billion on April 21st to just over RMB 122.1 billion last Friday (12th) in less than two months.

Last week, the Hong Kong exchange rate repeatedly hit strong guarantees, which caused the HKMA to sell the Hong Kong dollar in the open market at least five times in the last two weeks to maintain the linked exchange rate. In total, it sold nearly 20 billion Hong Kong dollars. (Profile picture)

The main reason for the continuous influx of capital into Hong Kong is probably the financial policy from the United States. In order to save the economy hit by the new crown epidemic, the United States has launched a number of financial "water release" policies and implemented flooding. The Fed has also implemented an "infinite QE" no-target monetary easing policy, and the federal standard interest remains at zero. From the financial crisis economy of the past 2008, we can see that the “water flooding” of funds caused by quantitative quantification will flow out of the United States to emerging markets in pursuit of higher returns. Hong Kong is undoubtedly one of these destinations.

National Security Law does not change investment enthusiasm

Hong Kong is the gateway for foreign investment in China, and it is normal for hot money to flow in when global funds are "flooded." From the perspective of capital flow, international investors' confidence in Hong Kong has risen, and in the short term, the concrete impact of the threat of US sanctions against the Hong Kong version of the National Security Law cannot be seen. Last Thursday (11th), US Treasury Secretary Steven Mnuchin stated that the US is studying the use of capital market measures to restrict the flow of US capital through the Hong Kong market, reflecting to a large extent that the US knows that it only depends on the so-called abolition of special status. It is impossible to control the capital market’s motivation to invest in China and Hong Kong in pursuit of interests.

Whether the United States will increase sanctions and what impact these sanctions will bring. We do not have a crystal ball. It is difficult to predict at this stage and it is beyond Hong Kong's control. However, the status of Hong Kong's financial center depends largely on the opening of the Chinese market to the outside world. Unless the world loses interest in investing in China, as long as China recognizes this financial center, its fundamental value will not be shaken. If they are worried about what the United States will do, it is better to do Hong Kong's role seriously and better serve as a window for China's foreign financial prescribing. I thought that under the big chess game between China and the United States, it would be a stubborn approach to please the United States for how much return it would bring to Hong Kong.

Hot money is an opportunity and a problem

Further thinking, if there is no more effective way for the United States to "sanction" Hong Kong for a while, and hot money continues to flow into Hong Kong, although it has a stimulating effect on the Hong Kong economy, it will cause other economic and social problems. In 2008, the United States led the country to implement the global "big water" monetary easing policy in response to the financial crisis. As a result, a large amount of funds flowed into Hong Kong.

On the one hand, when hot money flows into the financial market, the people who benefit the most will always be those with more capital, which in disguise contributes to the poverty gap. And a lot of hot money to invest in real estate will stir up property prices, making property prices far beyond the burden of normal people. The disparity between the rich and the poor and the difficulty of going upstairs are precisely the serious people's livelihood problems that have plagued Hong Kong in recent years, and the main cause of the deep-seated structural problems in Hong Kong. Given the "front road" of hot money in the financial tsunami, the Hong Kong government must embark on deepening social reforms to prevent these problems from deepening existing problems under the impact of hot money. If you leave it alone, the issue of people's livelihood will inevitably cause social unrest in the future.

Property prices are so high that many wage earners simply cannot afford to buy property. (Profile picture)

On the other hand, a large amount of hot money flows into Hong Kong, which also poses a certain threat to the long-term economic health of Hong Kong. From the experience of the financial crisis, it can be seen that after the US funds flowed out of the United States, they raised their local assets by investment in emerging markets, but once faced with the US financial crisis, they would "harvest" the interests of emerging markets and leave the funds. Shipped back to the United States. In the past, there was a precedent for this kind of operation in the financial tsunami in 2008. Eastern European countries that joined the capital camp under the "Su Dongbo" in the late 1990s were "harvested" in large quantities, which greatly affected the local economy. Although the situation in Hong Kong is relatively tough, as the US capital market becomes increasingly unhealthy, we must also be prepared to deal with the tide of capital flows in the event of a crisis in the United States. In general, it is better to have hot money inflows than not, but the government must also absorb past experience, do a good job of management, and mitigate its adverse effects.

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01 point of view

Hong Kong Exchange Linked Exchange Rate System