Hong Kong’s banking system holds up, as financial war chest expands and capital remains even if protest rallies deter tourists

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The size of the Exchange Fund grew by 0.02 per cent, or an increment of HK$700 million, to HK$4.138 trillion at the end of July, according to data by the Hong Kong Monetary Authority

The financial system’s aggregate balance, an indicator of banking liquidity, dipped by 0.06 per cent in July to HK$54.24 billion from a month earlier

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The Exchange Fund was HK$4.138 trillion at the end of July. Photo: SCMP

Enoch Yiu

Published: 6:48pm, 30 Aug 2019Updated: 10:56pm, 30 Aug 2019

Hong Kong’s financial system is holding up against 12 weeks of unprecedented public unrest in the city, as the government’s war chest grew while capital remained in China’s main offshore banking centre even as tourists and visitors stayed away amid increasing reports of violence.

The size of the Exchange Fund grew by 0.02 per cent, or an increment of HK$700 million, to HK$4.138 trillion at the end of July, bolstering the city government’s defences against hedge funds that are eyeing a chance to short-sell the local currency amid slower economic growth and the year-long US-China trade war.

The financial system’s aggregate balance, an indicator of banking liquidity, dipped by 0.06 per cent in July to HK$54.24 billion from a month earlier, according to the Hong Kong Monetary Authority’s data. The July balance declined by 50 per cent from last year, as the de facto central bank used its war chest to keep the local currency’s peg within a trading band against the US dollar.

Total deposits in the city’s banks and financial institutions shrank in July by HK$4.39 billion, or 0.03 per cent, to HK$13.603 trillion, the data showed. Compared with the same month a year earlier, July’s deposits rose 5.1 per cent.

“There may have been some outflow but the situation is not that worrying when compared with the Asian Financial Crisis of 1997 and 1998,” said DBS Bank’s managing director Tommy Ong. “The HKMA has sufficient assets in the Exchange Fund to defend the exchange rate of Hong Kong dollar, which has remained stable in recent months.”

To be sure, capital had been flowing out of Hong Kong since 2016, when the US Federal Reserve reversed a decade of cheap financing by raising interest rates, said Bruce Yam Hiu-ping, forex strategist of Everbright Sun Hung Kai in Hong Kong.