Hong Kong sees salvation from asset bubbles in weak currency

HONG KONG: Normally, when a currency is falling, a simple step exists to revive it: raising interest rates. But in Hong Kong there are no interest rates to raise, and that has created problems.

Hamstrung because it ceded monetary policy to the US Federal Reserve 35 years ago, the Asian financial hub has had no choice but to watch as a decade of radical stimulus by a foreign central bank sent money coursing across its borders. The inflows have jacked up prices on everything from apartments to car park spaces.

The situation is on the verge of boiling over: Hong Kong’s dollar has weakened to a point where intervention is about to become obligatory. And to politicians and anyone else concerned about asset bubbles in the city, it couldn’t be happening at a better time.

“Why have home prices risen non-stop for 10 years? It’s not related to the economy. It’s a purely monetary phenomenon,” said Raymond Yeung, an economist at Australia & New Zealand Banking Group Ltd in Hong Kong. “If Hong Kong rates don’t rise, it’s hard for asset prices to correct.”

When the currency reaches the weak end of its band against the greenback, the Hong Kong Monetary Authority (HKMA) will be compelled to buy Hong Kong dollars, thereby sucking up liquidity – and finally lifting interbank rates that are lagging behind their US equivalents. The widening rate discount is why the currency has been falling.

The HKMA pushed the Hong Kong dollar further in that direction last Thursday when it issued a statement ruling out issuing additional bills – sales that previously have helped lift the exchange rate.