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

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
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

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test