An estimated $4 billion have left Hong Kong for its rival, Singapore, according to Goldman Sachs.
“We found modest net outflow from HKD(ollar) deposits in Hong Kong and modest net inflow of FX deposits in Singapore,” analysts Gurpreet Singh Sahi and Yingqiang Guo wrote in a note to investors last Monday, adding:
“We believe the debate on Hong Kong outflow/liquidity will remain active and the data points for September (and beyond) critical in shaping the same.”
That follows a decline of $15.6 billion in foreign currency reserves in August, the biggest since monthly data was first published in 1997.
The Hong Kong Monetary Authority (HKMA) claimed this decline in foreign reserves was just a technicality “mainly due to a transfer of funds resulting in a higher amount of foreign currency deposits placed by the Exchange Fund with banks in Hong Kong,” they said.
Financial protests however continue in Hong Kong where there’s speculation HKD may breach the upper peg of 7.85 to the dollar so people have been converting HKD to USD since August.
Short sellers are also betting the peg will fall amidst a weakening economy.
The peg “is not designed to handle a domestic crisis, which has never happened before,” said Thomas Roderick, a portfolio manager at UK boutique fund house Trium Capital.
That was last month with the crisis deepening this Sunday as protests against an emergency law on mask wearing have brought the city to its knees. South China Morning Post said in a live update:
“The Hong Kong Association of Banks warns that cash refills to certain banks and ATMs will be delayed, a day after 10 per cent of some 3,300 machines across the city were trashed.
The industry body says the city’s banking system has sufficient liquidity to satisfy the cash withdrawal needs of customers.”
There are reportedly long queues at ATMs with some bank branches set on fire while barricades were set up with fist fights between protesters and police officers.
Some supermarkets are not opening. Those that have opened have seen panic buying with shelves running empty. That follows a targeting of the underground metro which they accuse of assisting the police. Local media reports:
“At least five MTR stations were targeted by protesters. Projectiles were thrown onto the tracks of Kowloon Tong station, two exits of Mong Kok station were set on fire, while protesters also broke open fire hoses and hurled a petrol bomb into Cheung Sha Wan station through an exit.”
Chinese soldiers have issued a warning according to Reuters “to Hong Kong protesters on Sunday who shone lasers at their barracks in the city” after a brief standoff that quickly ended.
China has not intervened, with its ambassador to UK stating in an interview on Newsnight that they believe local Hong Kong authorities have not lost control.
The ambassador said they will respect the one country two systems for 50 years as has previously been agreed, commenting not on what happens after that expires.
The protests, which at one point saw pretty much all of Hong Kong descend on the streets, have become increasingly tense with some on social media calling it “the revolutionary era of Hong Kong.”
They want democracy, the right to elect their own parliamentarians with some on Sunday “vandalising the district offices of at least three pro-Beijing lawmakers, including that of Priscilla Leung Mei-fun and Lo Wai-kwok, both of the Business and Professionals Alliance of Hong Kong.”
It’s unclear whether China will give them any concession, but the economy has slowed down drastically, down from 4.5% last year to just 0.5% so far.
If such slow down continues, then HKMA might have to cut interest rates which could put pressure on the peg.
“When there is a recession, the government cuts interest rates to help companies and individual borrowers to cope with a poor economy. However, under the currency board system, the HKMA will need to drive the interest rate up to defend the peg whenever it trades at the weak end,” Roderick said.
Raising interest rates while the economy is not doing well might lead to a recession, so Roderick speculates HKMA may instead just let the peg fall.
It’s unclear how much this is effecting China where inflation has increased to 2.8% while the economy has slowed down by their standards to 6.2%.
Hong Kong is seen as a gateway to the mainland, but there’s now clearly tension between the two as protests continue.