FX Asia: Currency Strength Proves Costly For Hong Kong
By Raymond Tsoi
A Dow Jones Newswires Column
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HONG KONG (Dow Jones)--The Hong Kong dollar has been acting in a decidedly unpegged-like manner lately: namely it has been strengthening.
This newfound strength certainly has proved costly for the Hong Kong Monetary Authority, which has spent more than US$1 billion since September in repeated interventions designed to staunch the U.S. currency's weakening. Such spending by the city's de facto central bank is all but unprecedented in the 20 years of the Hong Kong dollar's peg to its U.S. counterpart.
It also has proved painful for those investors who shorted the currency during the depths of severe acute respiratory syndrome crises early in the year, betting that the currency would remain weak through the year. "Some foreign investors may have shorted the Hong Kong dollar on speculation of a depeg and devaluation," says Hong Kong Financial Secretary Henry Tang. "As they no longer expect that to happen, those short positions need to be covered."
Still, Tang attributes much of the Hong Kong dollar's strength to an intangible factor: confidence. Underpinning that confidence is a range of factors from a recovering local economy, a rising domestic stock market and the feeling that Hong Kong has renewed attraction as an entryway to China, one of the world's biggest and fastest growing economies.
In recent months, stock-exchange trading volume has tripled from a year ago, as foreign investors flock to Hong Kong, selling U.S. dollars in order to buy shares with the local currency. While the Hang Seng index was mired at near-five-year lows in the spring, it is up more than 40% since then.
Meanwhile, the local economy is experiencing a sharp recovery from the outbreak of SARS, which damped economic activity through Asia, especially in the tourism and travel industries on which Hong Kong depends. Gross domestic product, or the value of all goods and services produced in a nation, rose 6.4% in the third quarter from the second quarter, compared with the 3.7% contraction in the second quarter from the first quarter. The turnaround mostly is the result of the revival of tourism-related sectors, continued export gains and the resumption of growth in consumer spending for the first time in two years, the government says.
But the economy's sharp recovery in the third quarter caught many currency investors off-guard, leaving them scrambling to cover short positions on the Hong Kong dollar and thereby leveraging its new strength as a result.
Then there is the next door neighbor. China boasts not only one of the fastest-growing economies in the world, but it also has a number of companies flocking to the Hong Kong stock market in a bid to raise cash. China Life Insurance Co. is seeking more than US$3 billion in an international public offering this month, making it by far the biggest IPO in the world this year. Preceding it to market have been Great Wall Automobile Holding Co., seeking to raise as much as HK$1.53 billion (US$197 million) this month, PICC Property & Casualty Co., which raised HK$5.41 billion in November, and a host of others.
Ever since the Hong Kong dollar strayed from its official peg rate of HK$7.80 in mid-September, the currency mostly has been stronger than HK$7.77. Talk of a possible revaluation of China's yuan only added to pressure on the U.S. currency and benefited the Hong Kong dollar, with the feeling that if China revalued then Hong Kong likely would follow suit.
As of 0315 GMT, the U.S. dollar was quoted at HK$7.7670 in Asia.
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