HK safe haven as storms engulf emerging markets

Updated: 2018-05-10 07:15

(HK Edition)

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Robust economic growth and an appreciating currency are acting as a magnet, leading foreign capital to flood into the United States, which in turn inflicts great pain on some emerging economies. Currency strategists at Bank of America Merrill Lynch told CNN that the US dollar rally has triggered an emerging-market sell-off in all regions.

A large portion of the foreign capital has been attracted to the US by rising bond yields; the US dollar has risen about 4 percent against other major currencies in the past few weeks.

Hardest-hit among emerging economies is Argentina, where depreciation of the local currency against the US dollar has continued unabated despite a sharp increase in interest rates - to more than 40 percent from around 30 percent previously. The Argentine government is reported to be seeking International Monetary Fund intervention to help stabilize its wobbling economy.

Of course, we can take comfort in knowing that such an economic calamity cannot happen to Hong Kong despite the exchange rate of its currency against the US dollar having, on numerous occasions, slid past the weak margin of the band allowed by the linked exchange-rate system, requiring central-bank intervention.

To be sure, the benchmark interbank rate, which represents banks' cost of funds, has also risen rapidly. But public confidence in the integrity of the system has never wavered because of the trust in Hong Kong Monetary Authority's capability in handling all imaginable attacks on the currency.

Such confidence, essential to maintaining stability in Hong Kong's external-oriented economy, is based on the government's consistent fiscal discipline. Unlike Argentina and other emerging markets, Hong Kong, a developed economy, has hardly any debt, domestic or foreign. What's more, the government is backed by a large fiscal reserve equivalent to more than 20 months of budget expenditure.

More important is that Hong Kong's foreign-exchange reserve, amounting to about $400 billion, is deemed sufficient to cover sudden and large outflow of overseas capital without putting too much strain on the local liquidity pool.

Of course Hong Kong interest rates, which have gone out of sync with those of the US, are widely expected to rise this year. But the increases are projected to be modest and gradual, with predictable impact on the asset markets.

 HK safe haven as storms engulf emerging markets

Hong Kong's consistent fiscal discipline and the resulting confidence in its economy can shield the city from the sell-off storms triggered by the US dollar rally. Jerome Favre / Bloomberg

(HK Edition 05/10/2018 page15)