Hong Kong Monetary Authority Reviews Currency Board Operations Amidst Global Economic Divergence

The Hong Kong Monetary Authority (HKMA) recently released the minutes of the Exchange Fund Advisory Committee Currency Board Sub-Committee meeting held on July 5, 2024. The discussion centered on the stability of the Hong Kong dollar (HKD) and the broader economic landscape, according to Hong Kong Monetary Authority.

Currency Board Operations

During the review period from April 25 to June 25, 2024, the HKD traded within a narrow range of 7.7987 to 7.8294 against the US dollar (USD). The HKD exchange rate strengthened between late April and mid-May, driven by dividend-related funding demand and vibrant equity market activities. Subsequently, it remained largely stable. HKD interbank rates continued to follow USD rates, influenced by local supply and demand dynamics. The Aggregate Balance was stable at around HK$45 billion, and the Convertibility Undertakings were not triggered. No irregularities were reported in the usage of the Discount Window, indicating smooth and orderly trading in the HKD exchange and interbank markets.

The Monetary Base increased to HK$1,917.51 billion by the end of the review period. Consistent with Currency Board principles, all changes in the Monetary Base were fully matched by changes in foreign reserves.

Monitoring Risks and Vulnerabilities

The Sub-Committee highlighted the asynchronous economic developments across advanced economies (AEs), noting divergent central bank policies in response to varying growth and inflation trends. While the US Federal Reserve maintained its stance in June due to persistent inflation and robust job growth, several AE central banks began lowering rates. The Fed’s “high for longer” forward guidance may continue to strengthen the USD and impact the exchange rates of emerging market Asian economies. Additionally, elevated global interest rates could challenge asset valuations and the credit quality of the private sector.

In Mainland China, economic recovery remained uneven, characterized by strong external trade but weak domestic demand and sluggish property market activities. Market sentiment improved following a more supportive policy tone from the April Politburo meeting, which included pledges to reduce housing inventory. However, the outlook remains challenging due to the complex geo-strategic environment.

Hong Kong’s economic activities expanded in Q1 2024, driven by a significant increase in merchandise exports and an upturn in the global tech cycle. The domestic economy is expected to recover at a moderate pace in 2024, although it faces risks and uncertainties related to the US policy rate path, global economic prospects, and geopolitical tensions. Despite active residential market transactions following policy relaxations in late February, market sentiment turned cautious in May amid new property launches at competitive prices and renewed uncertainty surrounding the US policy rate path. The commercial real estate market, particularly the office segment, remained subdued.

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