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

News
More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete today
News
people'I’d rather have Fred and Rose West quote my characters on childcare'
Life and Style
The new Windows 10 Start Menu
tech
Arts and Entertainment
There has been a boom in ticket sales for female comics, according to an industry survey
comedyFirst national survey reveals Britain’s comedic tastes
PROMOTED VIDEO
Travel
Bruce Chatwin's novel 'On the Black Hill' was set at The Vision Farm
travelOne of the finest one-day walks you could hope for - in Britain
Sport
footballManchester City 1 Roma 1: Result leaves Premier League champions in danger of not progressing
Arts and Entertainment
Gay and OK: a scene from 'Pride'
filmsUS film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
News
i100
Life and Style
Magic roundabouts: the gyratory system that has excited enthusiasts in Swindon
motoringJust who are the Roundabout Appreciation Society?
Arts and Entertainment
Hilary North's 'How My Life Has Changed', 2001
booksWell it was good enough for Ancient Egyptians and Picasso...
News
ebooksAn unforgettable anthology of contemporary reportage
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

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
The magic of roundabouts

Lords of the rings

Just who are the Roundabout Appreciation Society?
Why do we like making lists?

Notes to self: Why do we like making lists?

Well it was good enough for Ancient Egyptians and Picasso...
Hong Kong protests: A good time to open a new restaurant?

A good time to open a new restaurant in Hong Kong?

As pro-democracy demonstrators hold firm, chef Rowley Leigh, who's in the city to open a new restaurant, says you couldn't hope to meet a nicer bunch
Paris Fashion Week: Karl Lagerfeld leads a feminist riot on 'Boulevard Chanel'

Paris Fashion Week

Lagerfeld leads a feminist riot on 'Boulevard Chanel'
Bruce Chatwin's Wales: One of the finest one-day walks in Britain

Simon Calder discovers Bruce Chatwin's Wales

One of the finest one-day walks you could hope for - in Britain
10 best children's nightwear

10 best children's nightwear

Make sure the kids stay cosy on cooler autumn nights in this selection of pjs, onesies and nighties
Manchester City vs Roma: Five things we learnt from City’s draw at the Etihad

Manchester City vs Roma

Five things we learnt from City’s Champions League draw at the Etihad
Martin Hardy: Mike Ashley must act now and end the Alan Pardew reign

Trouble on the Tyne

Ashley must act now and end Pardew's reign at Newcastle, says Martin Hardy
Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?