HONG KONG (Reuters Breakingviews) - The boring Hong Kong dollar has been more exciting of late. A couple months after a U.S. hedge fund manager targeted the currency, it is moving sharply. Two giant upcoming stock sales are a major factor, but the recurring phenomenon flags a peculiarity of the system.
Since late May, Hong Kong’s dollar has been on a relative tear for a currency that trades in a narrow band against the U.S. dollar, to which it is pegged. It touched its strongest level in two years last week. The three-month Hong Kong Interbank Offered Rate ticked up to 2.7%, outstripping the equivalent U.S. dollar Libor rate of 2.3%.
At least some of the buzz can be chalked up to brewer Anheuser-Busch InBev’s Asian business seeking to raise nearly $10 billion in Hong Kong. Alibaba is also eyeing a listing on the local exchange that could pull in another $10 billion. Previous share offerings, including China Literature’s heavily subscribed one in 2017, have caused similar rate bounces.
The two mega-deals come during peak dividend season for Hong Kong-listed Chinese companies; they’ll fork out almost $19 billion in July, Morgan Stanley analysts estimate. The upshot is that many of the city’s dollars are being snapped up at once.
It’s a reminder of a local oddity. Issuers descend on the city to flog securities denominated in local dollars to investors who also hail from abroad. When combined with Hong Kong’s outsized financial sector – the $4 trillion total market capitalisation is more than 1,000% of local GDP, compared to about 150% for the United States, according to World Bank data – it means an occasional scramble for the money.
There’s no obvious immediate threat to the peg. The sharp movements do, however, provide a reminder of Joseph Yam’s warning about how Chinese capitals flows could cause volatility to become more pronounced and even dangerous. The former head of Hong Kong’s de facto central bank said it is “unrealistic” to expect a currency designed for a 7-million-person economy to service the international investing needs of more than a billion people. Being a financial gateway has its rewards, but also some potentially mounting risks.
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