The continued influx of renminbi deposits in Hong Kong is rapidly eroding the Special Administrative Region’s (SAR) US dollar deposit base and could eventually undermine the rationale for pegging the Hong Kong dollar to the latter currency, believes the Royal Bank of Scotland (RBS).
Historically the US dollar has accounted for around 50% of the total deposit base but that has now fallen to nearer 41%, according to CEIC data.
“Renminbi deposits are not eroding the banks’ Hong Kong dollar deposit base; instead they are eroding the US dollar deposit base....in fact, the Hong Kong dollar deposit growth remains healthy and has been accelerating over the last year,” wrote Woon Khien Chia, emerging market strategist at RBS on April 12.
Hong Kong decided to peg its currency to the US dollar with a currency board in 1982. The peg requires the Hong Kong Monetary Authority (HKMA), the SAR's de facto central bank, to maintain sufficient reserves in an anchor currency to back the Hong Kong dollar.
At present the renminbi surge poses no imminent threat to the peg. The HKMA still has enough US dollars to cover two times over the Hong Kong dollar monetary base.
But this could soon change. Chia argues that the identity of the anchor currency to the peg may come under threat if renminbi deposits continue building up at the pace that they currently are over the next two to three years.
“One can start to question the choice of the anchor currency if the [offshore renminbi] continues to grow in Hong Kong...a rough threshold would be when renminbi deposits surpass US dollar deposits,” he said.
A number of factors are building up in 2011 that are making it increasingly hard to ignore the issue of Hong Kong’s currency peg, as Asiamoney PLUS has recently argued.
This includes the fact cheap lending rates in Hong Kong (in step with the US Federal Reserve) are compelling mainland entities to borrow from Hong Kong banks, a headache for both Beijing and the HKMA.