HK dollar is next in firing line
Hong Kong is struggling to keep its currency pegged to the US dollar
Sunday 11 January 1998
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.
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