May 3rd, the Hong Kong Monetary Authority (HKMA) spent 46.539 billion Hong Kong dollars (approximately 6 billion U.S. dollars) to massively purchase U.S. dollars, marking the largest single-day purchase of U.S. dollars since 2004. This is also the first time since 2020 that the HKMA has intervened in the foreign exchange market through buying U.S. dollars.
The intervention was triggered by the Hong Kong dollar reaching the strong-side exchange rate guarantee level of 7.75 against the U.S. dollar on that day, which is the upper limit set by the linked exchange rate system. The HKMA promptly injected a large amount of liquidity into the market to stabilize the exchange rate within the “hard boundaries” of 7.75 to 7.85. This mechanism, established in 1983 and explicitly defined in 2005, has long been considered the cornerstone of financial stability in Hong Kong.
The HKMA stated that the recent strength of the Hong Kong dollar is mainly due to increased demand for the Hong Kong dollar related to stock investments, supporting the exchange rate of the Hong Kong dollar. Additionally, the appreciation of several regional currencies against the U.S. dollar in recent days has also boosted the Hong Kong dollar.
A report from HSBC Global Research pointed out that in the short term, the Hong Kong dollar may face liquidity pressure due to factors such as significant IPOs and dividend payments by listed companies, especially as the total summary balance in the Hong Kong banking system has dropped to less than 45 billion Hong Kong dollars.
In the financial markets, on May 2nd, the Hang Seng Index rose by 1.74%, while the Hang Seng Tech Index surged by 3.08%, reflecting market optimism towards the technology and consumer sectors. However, the underlying issues in the Hong Kong economy cannot be ignored. Although the linked exchange rate system ensures currency stability, it also restricts the flexibility of monetary policy, making the Hong Kong economy highly dependent on external conditions. In recent years, under the Chinese Communist Party’s rule, Hong Kong’s economic vitality has been constrained, with concerns about capital outflows due to a tightening political environment, posing challenges to its status as an international financial center.
On external factors, the recent weakening of the U.S. dollar has led to international funds flowing into Hong Kong for hedging, coupled with dividend payment periods in the Hong Kong stock market and the appreciation of neighboring market currencies, collectively driving up the demand for the Hong Kong dollar. However, analyses indicate that these short-term factors do not mask the fundamental issues facing the Hong Kong economy, such as overreliance on finance and real estate, insufficient innovation capabilities, pressure on small and medium-sized enterprises, and widening wealth gap.
Furthermore, ongoing tensions in U.S.-China relations, uncertain policy directions in mainland China, and a lack of openness in Hong Kong’s political environment continue to keep international capital’s confidence in the Hong Kong market fragile. Despite the recent strong performance of the Hong Kong dollar exchange rate, it has not fundamentally eased the pressure from foreign capital outflows and economic downturn.