Hong Kong to tap peg defence fund for first time in 40 years

[HONG KONG] Hong Kong is planning for the first time in 40 years to draw money from the fund that ensures the stability of its currency peg, in part to help finance the development of a technology hub on the city’s border with China.At an annual budget presentation on Wednesday (Feb 25), the government said it would withdraw HK$150 billion (S$24.2 billion) after a record-breaking year for the Exchange Fund, which serves as the last line of defence to maintain the Hong Kong dollar’s peg against the US currency.The withdrawal, if approved by an advisory committee, would be the first since 1984. The money will be transferred to the Capital Works Reserve Fund to support development of the Northern Metropolis and other infrastructure projects in the coming two years, according to the government.The HK$4.1 trillion fund works as a backstop for the city’s currency peg to the US dollar and is a key feature of Hong Kong’s role as an international financial hub and gateway to China. The city last year was forced to buy and sell billions of Hong Kong dollars to defend the peg because of unprecedented swings.In response to media inquiries, the Hong Kong Monetary Authority said in a statement that the proposed transfer wouldn’t affect the Exchange Fund’s ability to support the currency peg and the financial system, citing ample reserves and a rising surplus. The city’s de facto central bank added it has the capability and confidence to continue maintaining Hong Kong’s monetary and financial stability and integrity.By law, the Exchange Fund must maintain at least 105 per cent of assets against debt when making transfers. The current level of foreign reserves was about 1.6 times the size of the monetary base, which is sufficient to ensure stability after the payout, government officials said at a budget briefing on Wednesday. They asked not to be named.The fund had a record gain of HK$331 billion last year, helped by rising global markets. It’s had an average yearly income of about HK$98 billion since 2001.The Northern Metropolis project was announced five years ago by former Chief Executive Carrie Lam to help the city rebound from the 2019 protests and the pandemic. The current leader, John Lee, last year vowed to speed up development of a cross-border tech hub with China as the Asian financial centre searches for new growth drivers. BLOOMBERG