HK dollar is next in firing line

Hong Kong is struggling to keep its currency pegged to the US dollar

HONG KONG companies are increasingly hedging against the risk that the Hong Kong dollar, the last in Asia tied to the US dollar, may soon buckle like others in the region.

As Hong Kong was pulled deeper into the region's financial turmoil last week, bankers said companies were trying to limit their exposure in the event of a sudden devaluation. Hong Kong's benchmark stock index fell to a two-year low and interest rates surged as pressure mounted on the Hong Kong dollar.

"We're more and more concerned," said Hou Bojian, the financial controller of Guangdong Investment, whose businesses include property, hotels and brewing. The company is considering whether to hedge more and, so far, hasn't decided what to do, he said.

GDI and other Hong Kong companies together owe billions of US dollars to banks and bondholders. If the Hong Kong dollar's 14-year-old link to its American counterpart breaks, the cost of repaying that debt will surge.

The Hong Kong government has said repeatedly that it will keep the currency pegged at about 7.80 to the dollar, a link that has helped insulate the former colony from the currency swings roiling other Asian economies.

Yet the economic cost of keeping the peg - rising interest rates, declining property prices and stocks and slowing growth - keeps growing. Some economists say the Hong Kong dollar may weaken as much as 20 per cent if it is allowed to move freely.

A rush to hedge against the Hong Kong dollar is driving up the cost of buying such insurance. Companies typically hedge Hong Kong dollar exposure by buying forward currency contracts or cross-currency interest rate swaps. Six months ago, the cost of a 12-month forward contract was nearly zero; today, the rate is about 8.40, or more than 8 per cent above the spot rate. That means a Hong Kong company wanting to hedge HK$100m into US dollars would pay more than HK$8m to do so. But despite that exporters and importers, in particular, are stepping up their efforts to hedge.

As currencies plunge across the region - the Indonesian rupiah is down 46 per cent this year alone - Hong Kong must bear the economic cost of rising rates or bow to market pressure and sever the peg. Ordinary people are already feeling the pain. Home prices fell 20 per cent since October and are still declining.

Hong Kong banks may be forced to raise the rate they charge their customers to 10 per cent for the first time since June 1991 as their own borrowing costs surge. Rates are rising because investors are demanding higher and higher returns to hold Hong Kong dollars.

"The environment is very tough and a higher rate is the cost we have to pay," said Andrew Fung, treasurer at Commonwealth Bank of Australia. "Given the regional crisis, it's likely we're going to live in double- digits."

Given the turmoil sweeping the region, companies that earn money in Hong Kong dollars alone are probably trying to limit their exposure, said William Fung, managing director at Li & Fung & Co. "If they think there's any chance of a Hong Kong dollar devaluation, they've been doing some hedging," he said.

Schroder Securities in Asia issued a report on Friday warning that pressure on the Hong Kong dollar may grow. The firm said it expects the peg to hold "for the foreseeable future," though "at the cost to Hong Kong of high interest rates."

According to Schroders, Hong Kong companies such as Wharf (Holdings) Ltd. and Hysan Development Co. have more than 20 per cent of their debt in US dollars or other foreign currencies. Cheung Kong (Holdings) and Henderson Land Development Co. have even more.

Copyright: IOS & Bloomberg

PROMOTED VIDEO
Arts and Entertainment
Characters in the new series are based on real people, say its creators, unlike Arya and Clegane the Dog in ‘Game of Thrones’
tv'The Last Kingdom' embraces politics, religion, warfare, courage, love and loyalty, say creators
News
peopleThe Game of Thrones author said speculation about his health and death was 'offensive'
News
Justin Bieber performing in Paris earlier this year
people
Arts and Entertainment
Martin Freeman and Lauren O'Neil in Jamie Lloyd's Richard III
theatreReview: The monarch's malign magnetism and diabolic effrontery aren’t felt
Arts and Entertainment
'Molecular Man +1+1+1' by Jonathan Borofsky at Yorkshire Sculpture park
tv
News
Glamour magazine hosts a yoga class with Yogalosophy author Mandy Ingber on June 10, 2013 in New York City.
newsFather Padraig O'Baoill said the exercise was 'unsavoury' in a weekly parish newsletter
Extras
indybest
News
people'She is unstoppable', says Jean Paul Gaultier at Paris show
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Alexis Sanchez and apparently his barber Carlos Moles in Barcelona today
football
Arts and Entertainment
Miley Cyrus has her magic LSD brain stolen in this crazy video produced with The Flaming Lips
video
Arts and Entertainment
In his own words: Oscar Wilde in 1882
theatreNew play by the Oscar Wilde's grandson reveals what the Irish wit said at his trials - and what they reveal about the man
News
people
Arts and Entertainment
Unless films such as Guardians of the Galaxy, pictured, can buck the trend, this summer could be the first in 13 years that not a single Hollywood blockbuster takes $300m
filmWith US films earning record-breaking amounts at the Chinese box office, Hollywood is more than happy to take its lead from its new-found Asian audience
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Compliance Officer - Trading Firm - London

£55000 - £65000 per annum + excellent package & bonus expectations: Real Staff...

Senior Compliance Executive - Top Bank - London

£80000 - £90000 per annum + competitive: Real Staffing: A highly successful Co...

AVP Regulatory Affairs, Global Bank, London

£40000 - £50000 per annum + highly competitive package: Real Staffing: An oppo...

VP Operational Compliance - Global Bank

Highly competitive: Real Staffing: VP - Operational Compliance - Global BankA ...

Day In a Page

The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Hollywood targets Asian audiences as US films enjoy record-breaking run at Chinese box office

Hollywood targets Asian audiences

The world's second biggest movie market is fast becoming the Hollywood studios' most crucial
Grindr founder Joel Simkhai: 'I've found love on my dating app - and my mum keeps trying to hook me up!'

Grindr founder Joel Simkhai: 'I've found love on my dating app'

Five years on from its launch and Grindr is the world's most popular dating app for gay men. Its founder Joel Simkhai answers his critics, describes his isolation as a child
Autocorrect has its uses but it can go rogue with embarrassing results - so is it time to ditch it?

Is it time to ditch autocorrect?

Matthew J X Malady persuaded friends to message manually instead, but failed to factor in fat fingers and drunk texting
Westminster’s dark secret: Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together

Westminster’s dark secret

Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together
A History of the First World War in 100 Moments: Dulce et decorum est - a life cut short for a poet whose work achieved immortality

A History of the First World War in 100 Moments

Dulce et decorum est: a life cut short for a poet whose work achieved immortality
Google tells popular music website to censor album cover art in 'sexually explicit content' ban

Naked censorship?

The strange case of Google, the music website and the nudity take-down requests
Howzat! 8 best cricket bats

Howzat! 8 best cricket bats

As England take on India at Trent Bridge, here is our pick of the high-performing bats to help you up your run-count this summer 
Brazil vs Germany World Cup 2014 comment: David Luiz falls from leader figure to symbol of national humiliation

David Luiz falls from leader figure to symbol of national humiliation

Captain appears to give up as shocking 7-1 World Cup semi-final defeat threatens ramifications in Brazil