Capital outflows amid Hong Kong's protests could have caused record drop in forex reserves, analysts say

Karen Yeung
Sidney Leng
September 11, 2019 11:57 AM SGT
Money being taken out of Hong Kong amid the anti-governments protests, as well as China's cooling economy and the mainland's trade war with the United States, could have been the cause for the city's foreign exchange reserves posting their biggest monthly drop on record in August, analysts said.
Foreign exchange reserves fell from a record high of US$448.4 billion in July to US$432.8 billion last month, with the US$15.6 billion decline the biggest since the data was first published in 1988, the Hong Kong Monetary Authority (HKMA) said on Friday.
Total foreign reserve assets of US$432.8 billion represent about seven times the currency in circulation in Hong Kong or 45 per cent of the city's total money supply, added the HKMA, the city's de facto central bank.
Analysts said the sharp decline was likely to be a sign of capital outflows from the city along with a drop in exports, although a clearer picture would only be known when a breakdown of the quarterly data, including stock and bond flows as well as for trade and foreign direct investments, is released later in the year. Hong Kong is expected to announce its second quarter balance of payments in mid-September and third quarter figures in mid-December.
"Past experiences suggest portfolio investment is a likely candidate through which outflows occurred," said Frances Cheung, Asia head of macro strategy at Westpac Banking Corporation. "Negative net merchandise exports should have been another contributor."
Last month, the HKMA rejected rumours that it had loaned US$400 billion of its foreign currency reserve to mainland China through currency swaps and has not received repayment. HKMA stressed that the foreign currency reserve is monitored by Hong Kong's Audit Commission as well as other independent auditors.
The HKMA also introduced new measures to allow the city's lenders borrow from the monetary authority should they face an unexpected liquidity crunch, apparently in an effort to prevent the banking system from facing an unexpected shock at a time of unprecedented social unrest in the city.
Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said that stresses in Hong Kong's rapidly deteriorating...