What are the Strengths of the Hong Kong Economy and the HK Dollar?

While Hong Kong may have been one of the first jurisdictions after China to be hit by the dreaded coronavirus, the region has actually managed to avoid the worst of the condition (at least if the official figures are to be believed).

More specifically, Hong Kong has officially recorded 1,040 coronavirus cases since the outbreak first reaches its shores, resulting in just four fatalities. When you consider that the UK (which is now considered to be the epicentre of the virus in Europe) has recorded in excess of 28,000 deaths to date, it’s clear that Hong Kong could have been far more adversely affected.

Despite this, the woes of the HK economy have been compounded during the coronavirus outbreak, despite the fact that the Hong Kong dollar has fared relatively well.

We’ll explore this below, before exploring what these factors tell us about the strengths (or otherwise) of the Hong Kong economy.

Gains for the HK Dollar – A Surprising Trend?

The HK dollar has certainly performed surprisingly well of late, while it continues to bump against the top end of its narrow 7.75 – 7.85 range against the U.S. Dollar.

According to most metrics and platforms, this places it amongst the best-performing currencies during Q1 2020, even as the city struggles to contain the socio-economic fallout from the Covid-19 outbreak.

If we delve a little deeper, however, we see that the relative strength of the HK dollar is partially result of quantitative easing measures in Hong Kong. More specifically, the Hong Kong Monetary Authority (HKMA) has recently spent approximately $7.7 billion to defend the peg and safeguard its value, while ensuring that it remains attractive to foreign investors.

Of course, this trend is also being driven by Chinese investment chasing relatively cheap, Hong Kong-listed stocks. Overall, these factors are driving surprisingly healthy yields at this time, and this trend is unlikely to change markedly for the foreseeable future.

The reason for this is simple; as forex traders often borrow in currencies with lower base interest rates, and the Hong Kong government has taken steps to slash this of late.

This is creating inflows and allowing the currency to strengthen further over time, even against major pegs such as the GBP, the Euro and the aforementioned greenback.

Why is the Currency Growing Stronger as the Economy Weakens?

Of course, the investments made in reinforcing the value of the Hong Kong dollar are part of wider quantitative easing measures, which should in theory boost the short-term performance in the overall economy.

However, the issues plaguing the Hong Kong economy run deep, and cannot be attributed to the impact of coronavirus alone. In fact, the government has invested heavy sums in propping up the economy for months now, with the nation having been battered by month long protests throughout 2019 (prior to the partial lockdown).

Not only this, but it’s thought that the government may also have financed some of its increased spending with the deposits that it may hold in HKMA. With limited dollar amounts to hand, the central bank may have chosen to meet this demand by supporting the value of the HKD, driving international demand and selling higher volumes of the currency overseas.

This would explain the current chasm between economic and currency performance in Hong Kong, and it may be hard to reverse (and ultimately sustain) this trend over a sustained period of time.

What’s not in dispute is that increased fiscal spending will continue to drive higher levels of HKD demand, so any attempt at further quantitative easing measures will keep interest rates low and currency values high.

However, the longer-term implications of this strategy could be negative for the economy overall, especially if inflation rises and consumer confidence plunges further than it already has.

This article does not necessarily reflect the opinions of the editors or management of EconoTime