[HONG KONG] The Hong Kong stock exchange expects quotas for mainland China investors to be increased by over 30 per cent, its chief executive said on Friday, as heavy capital inflows forced the city's central bank to sell Hong Kong dollars to defend its currency peg.
The Hong Kong Monetary Authority (HKMA) had not intervened since last August, but the rush of funds into a share market that has swept to seven year highs, prompted two consecutive days of intervention as the Hong Kong dollar hit the strong end of its official trading range.
The city's de-facto central bank sold HK$6.2 billion (S$1.08 billion) on Friday, and HK$3.1 billion the previous day, bringing its US dollar purchases to around US$1.2 billion for the two days.
The wave of mainland Chinese buying came after Beijing last week encouraged institutions, including mutual funds and insurers, to purchase Hong Kong shares.
Speaking at a media briefing on Friday, Hong Kong Exchanges and Clearing Ltd (HKEx) Chief Executive Charles Li said regulatory authorities have been discussing raising the quotas for a while.
"Firstly there definitely will be quota expansion and secondly the expansion will not simply be 20 or 30 per cent," Mr Li said.
The quota will not be adjusted instantly following an abrupt market move, but will be an orderly adjustment and the market should wait patiently, Mr Li added.
The quotas limit how much mainland investors can buy Hong Kong stocks, and how much Hong Kong-based investors can buy stocks in China.
Mr Li did not say when the quotas would be raised.
Chinese investors snapped up all of the 10.5 billion yuan (S$2.32 billion) daily quota for buying Hong Kong stocks on both Wednesday and Thursday. It was the first time this has happened since the programme was launched in October last year.
"The USD/HKD may well be pinned down at 7.75 in the weeks to come, and the HKMA will likely need to continue its intervention to support the floor," said Koon How Heng, an analyst at Credit Suisse.
The Hong Kong dollar is pegged at 7.8 to the US dollar, but can trade between 7.75 and 7.85. Under the currency peg, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.
John Zhu, greater China economist for HSBC, said it was still too early to say whether HKMA would need additional tools to cope with pressure on the peg arising from the increase in capital inflows.
"As with everything, when the facts change then you should probably start to have a rethink but I don't think things have changed that drastically, certainly not from the macro level," Mr Zhu said.