Homebuyers should take note if Hong Kong’s dollar balance dips below HK$100 billion. Here’s why
With several indicators suggesting Hong Kong dollar liquidity is becoming tighter, banks’ higher borrowing costs could translate into higher mortgage repayments for homeowners
The Hong Kong Monetary Authority, the city’s de facto central bank, has spent HK$70.35 billion (US$6.5 billion) in the past five weeks out of its US$440 billion in foreign reserves to defend the local currency against hedge funds and short sellers.
What is the link between the HKMA’s intervention and the city’s aggregate balance
When the Hong Kong dollar falls to the weaker end of its peg to the US dollar, at 7.85 per dollar, the HKMA will buy Hong Kong dollars from commercial lenders and sell US dollars to support the local currency. The sale of Hong Kong dollars by commercial lenders will reduce their aggregate balance, or banks’ excess funds held in clearing accounts with the HKMA.
As such, the aggregate balance is also a measure of interbank liquidity, which shows the availability of funds for lending between banks. It is part of Hong Kong’s monetary base, in addition to the coins and notes in circulation and exchange funded bills.
Since April, when the HKMA started its intervention, the aggregate balance has fallen by 40 per cent to HK$109 billion.
Should mortgage holders take note of the aggregate balance’s psychologically important HK$100 billion mark?
Before the 2007-2008 Global Financial Crisis, Hong Kong’s aggregate balance had been as low as an average of about HK$5 billion, indicating that it could fall much further from its current level. But many analysts believe that the aggregate balance level falling below HK$100 billion would mean that Hong Kong interest rates will become more sensitive and rise more sharply because of drains in liquidity.
