In other economies rocked by the virus, such as mainland China, Thailand and Singapore, the central bank has let the currency depreciate, easing financial conditions. But Hong Kong is different. Its currency has been tied to the American dollar since 1983 and confined to a narrow trading band of HK$7.75–7.85 to the dollar since 2005. If it falls to the weak side, the Hong Kong Monetary Authority (HKMA) is obliged to sell as many American dollars as people want to buy for HK$7.85. That has stopped the currency falling further (see chart).
Economy
Just how stable is Hong Kong’s economy? – The Economist
“I WANTED TRAVELLERS to arrive and know exactly which city they were in,” wrote Andrew Bromberg, an architect, to explain his design for West Kowloon station, where high-speed trains arrive in Hong Kong from mainland China. The platforms are deep underground, but passengers can enjoy the city’s skyline through 4,000 glass panes suspended from the station’s tilted roof. The more adventurous can go up to the rooftop for a better view.
But not anymore. The station and its rooftop are cordoned off. Four of the 21 people in Hong Kong that have been infected with the Wuhan coronavirus arrived in the city by high-speed rail. The station has now been closed, alongside ten of the other 13 entry points from the mainland.
These closures may or may not slow the spread of the disease. But they will certainly hamper an economy already debilitated by months of fierce anti-government protests. Figures released on February 3rd showed that GDP shrank by 2.9% year-on-year in the last quarter of 2019, when the protests reached a peak. Worse may be to come. Analysts at UBS, a bank, expect a fall of over 6% in the first quarter of this year compared with the same period last year.
But will it always do so? Even before the protests erupted or the virus mutated, some observers began to wonder if the peg would endure. According to Hong Kong’s mini-constitution, its autonomy and even the existence of its own currency is guaranteed only until 2047, which is within the duration of a 30-year mortgage. Hong Kong, many fear, is destined to become just another Chinese city—and they do not have their own currencies. Even if it remains semi-detached politically, its economy is increasingly attached to China’s. Why should its financial conditions remain tethered to America’s?
In the forward-looking world of financial markets, that question leads naturally to another: if Hong Kong’s currency regime is destined to change some day, how hard would Hong Kong fight for it today, if the markets tested its will? Such a test is not too hard to envisage. In December, property prices fell by 1.7%, compared with the previous month, and are now almost 5% below their peak. If those falls gained momentum, speculative capital might quit the market and the city. A collapse in property prices would also test the banking system. Its assets are worth 845% of Hong Kong’s GDP (although only 30% of its total loans are spent on Hong Kong property development or home purchases). And many of the deposits on the other side of its balance-sheet are held by non-residents, who might prove flighty in a crisis.
According to its defenders, Hong Kong’s currency peg is “virtually impregnable”. The HKMA’s foreign-exchange reserves amount to $440bn, twice as much as the money supply, narrowly defined to include banknotes and the banks’ claims on the monetary authority. The banks would run out of Hong Kong dollars before it ran out of American ones.
Why then is it only “virtually” impregnable? For one thing, there are broader definitions of money supply. A war chest of $440bn may be large compared with banks’ deposits at the HKMA. But it is small compared with customers’ deposits with banks (HK$6.9trn, equivalent to $880bn). If every depositor wanted to convert their holdings into American dollars, there would not be enough to go around.
Such conversions would also have broader economic implications. Every Hong Kong dollar sold to the monetary authority disappears. All else equal, it then becomes dearer for the banks to borrow the diminishing number of Hong Kong dollars that remain. These high interest rates make holding the currency more lucrative and short-selling it more costly. But insofar as households and firms still need to borrow in Hong Kong dollars, these high interest rates also hurt the economy. How much pain would Hong Kong be willing to take?
The peg’s downfall may be imaginable. But is it probable? One place to look is the options market, where investors can hedge against the risk of the currency moving outside the band. For about 40% of the period from June 2005 to July 2018, option prices implied that the odds of the peg breaking were above 10%, suggests a recent study by Samuel Drapeau, Tan Wang and Tao Wang of Shanghai Jiao Tong University. But for most of that time markets were betting on the currency strengthening past HK$7.75 to the dollar, not weakening past HK$7.85.
Bearish bets became more popular last year during the worst of the protests. But the speculation was not as fierce as it had been in 2016, after China clumsily devalued the yuan. Capital outflows picked up in the third quarter of last year, diminishing Hong Kong’s foreign-exchange reserves. But reserves have stabilised since, helped by a truce in the trade war between America and China. Hong-Kong dollar deposits are lower than they were six months ago, but still higher than they were a year ago.
Any signs of sustained capital outflows are, then, “embryonic”, says Alicia Garcia Herrero of Natixis, a bank. If capital is leaving, its speed of departure is reminiscent of one of Hong Kong’s quaint trams, not one of its bullet trains.■
This article appeared in the Finance and economics section of the print edition under the headline “Just how stable is Hong Kong’s economy?”
Continue Reading
VICTORIA – British Columbia is forecasting a record budget deficit and a rising debt of almost $129 billion less than two weeks before the start of a provincial election campaign where economic stability and future progress are expected to be major issues.
Finance Minister Katrine Conroy, who has announced her retirement and will not seek re-election in the Oct. 19 vote, said Tuesday her final budget update as minister predicts a deficit of $8.9 billion, up $1.1 billion from a forecast she made earlier this year.
Conroy said she acknowledges “challenges” facing B.C., including three consecutive deficit budgets, but expected improved economic growth where the province will start to “turn a corner.”
The $8.9 billion deficit forecast for 2024-2025 is followed by annual deficit projections of $6.7 billion and $6.1 billion in 2026-2027, Conroy said at a news conference outlining the government’s first quarterly financial update.
Conroy said lower corporate income tax and natural resource revenues and the increased cost of fighting wildfires have had some of the largest impacts on the budget.
“I want to acknowledge the economic uncertainties,” she said. “While global inflation is showing signs of easing and we’ve seen cuts to the Bank of Canada interest rates, we know that the challenges are not over.”
Conroy said wildfire response costs are expected to total $886 million this year, more than $650 million higher than originally forecast.
Corporate income tax revenue is forecast to be $638 million lower as a result of federal government updates and natural resource revenues are down $299 million due to lower prices for natural gas, lumber and electricity, she said.
Debt-servicing costs are also forecast to be $344 million higher due to the larger debt balance, the current interest rate and accelerated borrowing to ensure services and capital projects are maintained through the province’s election period, said Conroy.
B.C.’s economic growth is expected to strengthen over the next three years, but the timing of a return to a balanced budget will fall to another minister, said Conroy, who was addressing what likely would be her last news conference as Minister of Finance.
The election is expected to be called on Sept. 21, with the vote set for Oct. 19.
“While we are a strong province, people are facing challenges,” she said. “We have never shied away from taking those challenges head on, because we want to keep British Columbians secure and help them build good lives now and for the long term. With the investments we’re making and the actions we’re taking to support people and build a stronger economy, we’ve started to turn a corner.”
Premier David Eby said before the fiscal forecast was released Tuesday that the New Democrat government remains committed to providing services and supports for people in British Columbia and cuts are not on his agenda.
Eby said people have been hurt by high interest costs and the province is facing budget pressures connected to low resource prices, high wildfire costs and struggling global economies.
The premier said that now is not the time to reduce supports and services for people.
Last month’s year-end report for the 2023-2024 budget saw the province post a budget deficit of $5.035 billion, down from the previous forecast of $5.9 billion.
Eby said he expects government financial priorities to become a major issue during the upcoming election, with the NDP pledging to continue to fund services and the B.C. Conservatives looking to make cuts.
This report by The Canadian Press was first published Sept. 10, 2024.
Note to readers: This is a corrected story. A previous version said the debt would be going up to more than $129 billion. In fact, it will be almost $129 billion.
The Canadian Press. All rights reserved.
NANAIMO, B.C. – Former Bank of Canada governor Mark Carney says he’ll be advising the Liberal party to flip some the challenges posed by an increasingly divided and dangerous world into an economic opportunity for Canada.
But he won’t say what his specific advice will be on economic issues that are politically divisive in Canada, like the carbon tax.
He presented his vision for the Liberals’ economic policy at the party’s caucus retreat in Nanaimo, B.C. today, after he agreed to help the party prepare for the next election as chair of a Liberal task force on economic growth.
Carney has been touted as a possible leadership contender to replace Justin Trudeau, who has said he has tried to coax Carney into politics for years.
Carney says if the prime minister asks him to do something he will do it to the best of his ability, but won’t elaborate on whether the new adviser role could lead to him adding his name to a ballot in the next election.
Finance Minister Chrystia Freeland says she has been taking advice from Carney for years, and that his new position won’t infringe on her role.
This report by The Canadian Press was first published Sept. 10, 2024.
The Canadian Press. All rights reserved.
HALIFAX – The Nova Scotia government has introduced a bill that would kick-start the province’s offshore wind industry without federal approval.
Natural Resources Minister Tory Rushton says amendments within a new omnibus bill introduced today will help ensure Nova Scotia meets its goal of launching a first call for offshore wind bids next year.
The province wants to offer project licences by 2030 to develop a total of five gigawatts of power from offshore wind.
Rushton says normally the province would wait for the federal government to adopt legislation establishing a wind industry off Canada’s East Coast, but that process has been “progressing slowly.”
Federal legislation that would enable the development of offshore wind farms in Nova Scotia and Newfoundland and Labrador has passed through the first and second reading in the Senate, and is currently under consideration in committee.
Rushton says the Nova Scotia bill mirrors the federal legislation and would prevent the province’s offshore wind industry from being held up in Ottawa.
This report by The Canadian Press was first published Sept. 10, 2024.
The Canadian Press. All rights reserved.
Sports56 mins ago
France investigating disappearances of 2 Congolese Paralympic athletes
News3 hours ago
A linebacker at West Virginia State is fatally shot on the eve of a game against his old school
News3 hours ago
Hall of Famer Joe Schmidt, who helped Detroit Lions win 2 NFL titles, dies at 92
Media1 year ago
12 Bizarre Things People Did Just To Make Social Media Content
Investment5 years ago
dynaCERT Inc. Invites You to Join Us at the Vancouver Resource Investment Conference | INN – Investing News Network
Sports4 years ago
AP source: Bears acquiring quarterback Nick Foles from Jaguars – Sportsnet.ca
-
News5 hours agoRCMP say 3 dead, suspects at large in targeted attack at home in Lloydminster, Sask.
-
News15 hours agoCanadanewsmedia news September 12, 2024: Air Canada pilot strike looms, BC transit strike talks resume
-
News15 hours agoRBC names Katherine Gibson as permanent chief financial officer
-
News5 hours agoNova Scotia adopts bill declaring domestic violence in the province an epidemic
-
News3 hours agoHall of Famer Joe Schmidt, who helped Detroit Lions win 2 NFL titles, dies at 92
-
News4 hours agoB.C. to scrap consumer carbon tax if federal government drops legal requirement: Eby
-
News13 hours ago
Local Toronto business story – Events Industry : new national brand, Element Event Solutions
-
News14 hours agoReggie Bush was at his LA-area home when 3 male suspects attempted to break in
