Despite extradition protests, China’s economic stimulus and US monetary policy easing leave Hong Kong well placed
- China’s stimulus measures and the US Fed’s expected interest rate cut are likely to boost the Hang Seng Index, which in turn will support the Hong Kong dollar. Traders shorting the currency should rethink their strategy
Yet, if Hong Kong hadn’t been beset by controversy over the proposed extradition bill, there’s a persuasive argument that, rather than having downside concerns, investors should instead be focusing on the near-term potential upside for Hong Kong assets.
“It’s worth remembering that the Hong Kong dollar has been under pressure for virtually all of this year, with spot stuck close to the edge of the band from late January onward,” Simon Derrick, chief currency strategist at US bank BNYMellon wrote last Thursday.
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Meanwhile, the more speculators in the spot market seek to test the HKMA’s resolve by shorting the Hong Kong dollar at 7.85 to the greenback, the more Hong Kong dollars have to be borrowed to fund that position.
That’s okay when the cost of borrowing Hong Kong dollars is less than the yield earned from holding greenbacks.
But when, as recently occurred, the cost of funding the short Hong Kong dollar position exceeds the return accrued from being long on greenbacks, speculators who primarily like the trade for its positive carry are minded to exit their positions and buy back their Hong Kong dollars.
Hong Kong “will benefit from Beijing’s programme of measured credit and fiscal easing, which includes boosting infrastructure spending and encouraging banks to ramp up on-balance sheet lending,” wrote Eleanor Olcott, China Policy analyst at research firm TS Lombard last week. “The expected Fed cuts … will help ease monetary conditions in [Hong Kong], which imports US monetary policy owing to the US dollar/Hong Kong dollar peg.”
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In normal circumstances, Hong Kong would surely be a prime beneficiary of a combination of Chinese economic stimulus and lower US interest rates. The Hang Seng Index should rise rather than fall. Assisted by overseas capital inflows, the Hong Kong dollar should appreciate rather than be stuck near HK$7.85 to the greenback.
As for the now-suspended extradition proposal itself, even if it had been enacted under the original timetable, TS Lombard’s Olcott argued “the short-term impact of this bill should not be exaggerated” while nevertheless acknowledging that, in the longer term, Hong Kong will become “increasingly entangled in the geopolitical struggle” between China and the US.
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Of course, if in the years ahead, the relationship between China and the US is going to be more fractious, it would be unrealistic to assume Hong Kong will not be dragged into the fray. Yet the future is unwritten while market gains and losses are made in the present.
The extradition bill has been a tremendously emotive subject but if investors can strip that issue from their calculations, then the near-term outlook for Hong Kong assets looks positive.
Neal Kimberley is a commentator on macroeconomics and financial markets