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China Stock Turmoil 2015
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Norman Chan Tak-lam, chief executive of Hong Kong Monetary Authority meets the media on Wednesday. Photo: Bruce Yan

Update | Hong Kong facing capital outflows if US Fed raises interest rates, HKMA chief warns

Capital outflows may hit Hong Kong if the United States raises rates for the first time in a decade as the interest rate gap may prompt investors to move their Hong Kong dollar assets to the US dollar.

Capital outflows may hit Hong Kong if the United States raises rates for the first time in a decade as the interest rate gap may prompt investors to move their Hong Kong dollar assets to the US dollar.

"The US interest rate rise may lead to some capital outflow,” Hong Kong Monetary Authority chief Norman Chan Tak-lam told reporters ahead of the start of the two-day US Federal Reserve meeting on Wednesday.

But he added that but “since the US interest rate rise would be in a gradual process, I do not think we would see a massive outflow immediately."

Chan said HKMA will immediate follow any US interest rate movement and will increase the base rate of the discount window offered for banks.

Hong Kong pegs the local currency to the US dollar so the HKMA needs to synchronise any interest rate rise in the US. But he said the deposits and lending rates to be determined by commercial banks may not rise immediately, which would result in a gap between Hong Kong and US interest rates.

Chan said since the US adopted a monetary easing policy after the 2008 financial crisis, there were US$110 billion in hot money inflows to invest in the local stock and property markets. This has increased the local aggregate banking balance to over HK$300 billion.

"These data show the Hong Kong banking is very liquid and I do not worry about the potential some capital outflows would cause any liquidity problem. The HKMA will closely monitor the situation," he said.

Bankers and brokers however do not think much capital outflow from the market. Hang Seng Bank executive director Andrew Fung said the interest rate gap need to be wide enough as four to five per cent between Hong Kong and the US to see much capital outflow.

Christopher Cheung Wah-fung, a lawmaker for financial services sector, also said the stock market performance on Wednesday did not reflect any worry over capital outflows.

“Investors are already well prepared for an US interest rate rise. I do not think it will shock the market even if the Fed will decide to increase the interest rate this week,” Cheung said.

“The devaluation of yuan, as well as whether Beijing has enough measures and policies to rescue the weak stock markets in the mainland, may have a bigger impact to the Hong Kong stock market outlook than the US rate rise,” Cheung said.

The HKMA has intervened in the money market seven times this month, spending a total of HK$47.12 billion to weaken the Hong Kong and keep the local dollar near the top end of its trading band at HK$7.75 to the greenback.

Chan said the recent battle to defend the peg was due to the devaluation of China’s yuan in August which caused investors to shift their yuan deposits and investment back to the Hong Kong dollar, bolstering and strengthening the local currency.

"I think this is likely to be a short-term phenomena. After the yuan stablises, the Hong Kong dollar exchange rate will become stable. I do not believe the yuan will devalue much further as the conditions would not support such a move," said Chan.

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