Paul Chan Urges Calm Over Capital Outflow

The Financial Secretary Paul Chan says the public shouldn't be overly worried about a recent capital outflow from Hong Kong and that the SAR has a huge buffer to deal with the outflow.

The Monetary Authority has repeatedly bought the local currency from the market since Friday.

Writing in his weekly blog, Chan said he expected that the Monetary Authority would move to support the local currency as it hit the weak side of the dollar peg. But he said that's not because he has a crystal ball, but there were repeated warnings from financial officials that interest rate rises in the US would inevitably lead to funds leaving Hong Kong.

The US central bank has increased the cost of borrowing six times since late 2015 but local banks didn't follow suit at all given the abundant supply of money here. The widening interest rate gap between the US and Hong Kong has lured investors to move funds to the US for a better return.

Chan says the capital outflow will create an environment for the normalisation of local interest rates, and is part of the design of the linked exchange rate system. He says the one-month interbank lending rate, which is widely used for mortgages, has recently risen to more than 0.8 percent - up from 0.2 percent three years ago, and that the cost of borrowing will inevitably increase further.

He said Hong Kong will be able to withstand this round of outflow of funds as it did during the 2008 global financial crisis and the 2011 euro debt woes.

Chan said the Monetary Authority has put one trillion US dollars in liquid assets which can be turned into cash quickly in the event of a massive sell-off of the Hong Kong dollar in the market.

On top of that, he said Hong Kong's huge foreign exchange reserves will provide a major buffer to ease off the impact of capital outflow. He said he's confident Hong Kong can withstand the challenges arising from a massive fund outflow.