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Hong Kong Ramps Up Intervention to Curb Local Currency

Monetary Authority Injects Billions Into Market in July as Foreign Funds Flow In

ENLARGE

The HKMA maintains a strict trading band for the Hong Kong dollar. Agence France-Presse/Getty Images

By Fiona Law Aug. 1, 2014 4:59 a.m. ET

Hong Kong's de facto central bank injected $65.1 billion Hong Kong dollars (US$8.4 billion) into the foreign-exchange market in July to defend the local currency peg to the U.S. dollar as foreign funds continued to pour into the city to feed a hunger for Chinese assets.

Funds have been flowing into Hong Kong, which offers foreigners an easy way to tap Chinese stocks and bonds, at a faster pace than late 2012, when the Hong Kong Monetary Authority last intervened as investors' risk appetite for the city's stocks rose.

At that time, HKMA injected HK$107 billion (US$13.8 billion) into the forex market from October to December in a bid to cool the Hong Kong currency. The latest intervention totaled more than half that amount in the span of a single month.

The HKMA—obliged to buy or sell the local currency whenever it touches either side of the authority's HK$7.75-HK$7.85 band against the U.S. dollar—said Saturday that it attributed the strength of the Hong Kong dollar to listed companies' dividend payments, cross-border merger-and-acquisition deals such as Oversea-Chinese Banking Corp.'s HK$40 billion takeover of Wing Hang Bank Ltd., as well as an active market for initial public offerings.

In July, the benchmark Hang Seng Index had its best month since 2012, posting a 6.8% gain and hitting a three-year high, as China's improving economy persuaded investors to snap up the city's stocks, which are made up mostly of mainland Chinese companies.

Russia's second-largest mobile operator, OAO MegaFon , has decided to keep about 40% of its cash reserves in Hong Kong dollars because of global market instability and as the West imposes sanctions on Moscow in a bid to force President Vladimir Putin to end his support for separatist rebels in Ukraine, The Wall Street Journal reported this week.

The fact that China's Huawei Technologies Co. is its main equipment manufacturer was another factor in MegaFon's decision, according to the report.

On Friday, the Hong Kong dollar remained sticky at the strong end of its trading band—HK$7.75 per dollar—and analysts have said they expect it to stay elevated as a program that allows direct trading between Hong Kong and Shanghai shares was likely to stoke demand for the local currency.

"But funds do not flow in one direction only," Peter Pang, HKMA's deputy chief executive, said Saturday. "Last year's market turmoil caused by a large-scale outflow of funds from certain emerging markets showed that the direction of fund flows could change spontaneously in response to investors' sentiments."

"As the U.S. economy recovers and its monetary environment normalizes, there remain considerable uncertainties in the future direction of fund flows," Mr. Pang said.