Whe’s afraid of capital outflow? Certainly not the Hong Kong Monetary Authority which is charged with managing, among other things, the linked exchange rate system.
In an article published in the central bank’s website, HKMA calls on the market to stay calm on the weakening of the Hong Kong dollar, which dropped below the pegged exchange rate of HK$7.85 against one US dollar several times in the past few weeks. Many analysts have attributed the weakening Hong Kong dollar to the outflow of overseas capital as the spread between Hong Kong and the US interest rates widened after five US rate hikes.
According to HKMA, an estimated $130 billion, or the equivalent of HK$1 trillion, of overseas capital has flowed into Hong Kong since the kickoff of the US economic stimulation program in 2009. The HKMA has sufficient financial resources to meet its obligation as a “super money changer” in the event of a sudden and massive withdrawal of foreign capital, the central bank said.
Although investors have little doubt about the central bank’s capability in maintaining financial stability under the linked exchange rate system, they have other concerns. It’s widely recognized that the stock rally and property boom have been fanned mainly by the influx of overseas capital. Investments through the stock connect programs alone are estimated to account for more than 10 percent of the average daily turnover on the stock exchange.
The impact of overseas investments on the Hong Kong property market has been even more pronounced. Mainland enterprises were reported to have paid record-breaking prices for development lands in highly contested government auctions. Overseas buyers are said to have dominated the higher end of the property market, helping to set price trends for all other segments.
A massive outflow of overseas funds would almost certainly sap confidence, leading to sharp price corrections. The bursting of the property bubble pumped up by overseas capital, which, in effect, is a form of foreign debt, could rock the financial system even if the exchange rate mechanism could hold.