This will never work (Vol 1, No 33)
Going to try to squeeze in one more post before I disappear for two weeks of summer vacation. Be warned, in the past, whenever I went on long holidays, the markets tend to go crazy (both up and down).
Revisiting the HKD Aggregate Balance
Two days ago, we talked about the strong USD and the weak Rmb. In Hong Kong, although our currency is officially pegged to the USD, there is a band that allows the HKD to trade within 7.75-7.85 to the USD. When the currency hits the weak side, 7.85, of the convertibility undertaking, the HKMA steps in, buys HKD from the market, and shrinks the money supply.
As we have written previously, HK$100bn in the Aggregate Balance was supposed to be the magic number whereby liquidity tightens and forces banks to raise the prime rate. So far, although the US Fed has raised rates seven times and 175bps, the Hong Kong banks have stood pat.
Stops and starts, could another move be on its way?
In the middle of April, the aggregate balance moved furiously, dropping from HK$179bn to HK$128bn within a span of eight days. There was another leg down in the middle of May when the balance dropped from HK$128bn to HK$109bn.
Over the past month, the aggregate balance has been more or less unchanged, providing a bit of reprieve for those fearing a hike in local interest rates.
Total Monetary Base now back to January 2017 levels
While the Aggregate Balance has been stable since May 16, Hong Kong’s Total Monetary Base has continued to shrink bit by bit.
Unlike previous instances where the reduction in Aggregate Balance was more than offset by an increase in Outstanding Exchange Fund Bills and Notes, this time around, there hasn’t been a corresponding offset.
Since May 16, Hong Kong’s total monetary base has fallen from HK$1,664.088bn to HK$1,642.077bn. To put this in historical context, Hong Kong’s monetary base has now returned to January 2017 levels.
If you look at downtick on the far right side of the chart, you’ll see that this is not like the past adjustments.
If affordability is irrelevant, then it’s all about liquidity
Why is this important? Because, it’s been all about liquidity.
The property bulls have argued that affordability is now an obsolete concept and nowadays it’s all about liquidity and capital flows from China. If they are right, then Hong Kong monetary base better start ticking up again real soon.
But then again, I’m sure as liquidity continues to drops, they will just find another argument like how property is a lower volatility asset, a better alternative to the stock market, a safe haven for Chinese money, or how it benefits from a sharing economy (btw, if we share spaces, doesn’t it mean less demand and not more?)
Go ahead, have your cake and eat it too but just remember when you go for all three vices, your arteries will eventually clog and you know what come next.
See you in two weeks.
This will never work.