As published on businesstimes.com.sg, Tuesday 30 May, 2023.
Banks in Hong Kong borrowed the largest amount of short-term cash in over two years from the authorities, suggesting there was sudden demand for liquidity.
The Hong Kong Monetary Authority (HKMA) – the city’s de-facto central bank – loaned out HK$3.77 billion (S$651 million) through its discount window on Monday (May 29), the most since January 2021, according to data compiled by Bloomberg. Lenders had only tapped the facility six other days this year, with the next largest amount at just HK$844 million.
With the HKMA buying the city’s currency to manage its peg to the US dollar, liquidity has tightened, and Hong Kong interbank offered rates have been driven closer to the comparable US borrowing costs.
Still, the overnight Hibor being more than 120 basis points below the HKMA’s discount window indicates an abrupt demand for cash, which spurred the usage of the facility. The overnight borrowing rate edged lower to 4.21 per cent on Tuesday, after jumping 74 basis points a day earlier.
“Basically it shows the higher rates and recent developments like the banking crisis and US debt limit content have made it harder for banks to raise funds via interbank channels,” said Stephen Chiu, chief Asia FX & rates strategist at Bloomberg Intelligence in Hong Kong. “Their lines filled up and couldn’t be utilised, so had to revert to HKMA.”
The pick-up of borrowing costs is the side effect of the HKMA’s repeated intervention, which reduced the aggregate balance – a gauge of interbank cash supply – to the lowest level since 2008.
The discount window can serve as a “lender of last resort” if payments between Hong Kong banks fail, Bank of America’s Asia strategist Cheung Chun Him wrote in a note on Monday. “The scramble for funding will be particularly acute during quarter-ends, when the overnight funding cost is seasonally increased,” he added, noting that the use of this facility has been rising since April.
The HKMA has defended the currency peg over the past year, as the Hong Kong dollar was repeatedly pushed to 7.85 per greenback, the weakest that it is allowed to trade. However, some analysts believe that Monday’s borrowing is not part of a systematic trend.
“The absolute amount of cash HKMA offered on Monday was small, and it seems related to thin market conditions during the US holiday,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.
The easing of overnight Hibor Tuesday suggests the squeeze earlier was an one-off event, he said, adding that he expects liquidity to remain relatively tight, and that local rates may rise further as “the Fed’s rate hike in June is on the table”.