Hong Kong interbank liquidity shrinks towards lowest since 2008
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HONG Kong’s interbank liquidity is falling towards its lowest level since the global financial crisis, following a series of intervention by the city’s de facto central bank to defend the local currency’s peg to the US dollar.
The city’s aggregate balance is set to drop to HK$49.2 billion (S$8.4 billion) on Thursday (Apr 20) when the Hong Kong Monetary Authority (HKMA) settles its earlier purchase of HK$6.9 billion to keep the currency peg intact. The key gauge of interbank liquidity already has shrunk about 90 per cent from its peak in 2021, though the impact on borrowing costs have been muted so far.
Traders have been taking advantage of low borrowing costs in Hong Kong to fund a US dollar carry trade, which in turn leads to pressure on the local currency. As the HKMA keeps draining liquidity to defend the peg, lending rates in the city may rise, potentially hurting a nascent recovery in the property market.
“As the balance drops towards zero, which is possible and not an issue as this was the case before the global financial crisis, Hibors will eventually have to rise and catch up with US rates,” said Stephen Chiu, chief Asia FX & rates strategist at Bloomberg Intelligence, referring to the Hong Kong Interbank Offered Rate. “Only a quick reversal in the Fed’s policy stance could help avoid this, yet this remains unlikely.”
The overnight Hibor jumped 42 basis points on Wednesday to 2.1 per cent, which is still a long way off the US Secured Overnight Financing Rate of 4.8 per cent. The concern is that banks will turn more cautious as liquidity keeps getting drained, which leads to a spike in short-term rates to squeeze those who have been long US dollar, short Hong Kong US dollar, according to a report by Mizuho Bank last week.
To be sure, the drop in liquidity is part of the design of Hong Kong’s currency regime, occurring when local rates are lower than those in the US. The city’s banks are generally well capitalised and flush with deposits. The HKMA has repeatedly said the local financial system is sound and that the peg is functioning well.
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A rise in Hibor, which is the city’s mortgage-pricing benchmark, will worsen the burden on home buyers and encourage property developers to liquidate their inventories at lower prices, said Samuel Tse, an economist at DBS Group Holdings. “This is not good news for the recovering economy.” BLOOMBERG
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