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Hong Kong reliant on easy money

Way back in October 1983, a young Hong Kong broker was working on a Saturday when his boss rushed through, yelling at everyone to buy Hong Kong dollars. News travelled fast in the city then: within hours the authorities pegged the currency to the US dollar at a tidy profit for local currency holders. Then, and since, weakness for Hong Kong’s currency has typically been related to fears about its relations with China. But now it is nearing its weakest point in a decade and the city’s future is not the reason.

The Hong Kong dollar’s slide — Monday took it past HK$7.82 for only the third time in 10 years — is a side-effect of years of loose monetary policy. The territory is in the unique position of having interest rates policy pegged to the US and its prospects tied to China. Over the past decade those two factors have produced a boom and several bubbles. Hong Kong’s position as the world’s most expensive property market, where car parks sell for $3bn, is just one example of what easy money has done.

With China slowing and the US raising rates, this in theory should have trapped the city between a rock and a hard place. But that has not happened because so much money is available that banks have not needed to follow the Hong Kong Monetary Authority in tracking US rate rises. Chinese interest in parking funds in the city has only added to the cash pool. On Monday the gap between three-month US money and its Hong Kong equivalent hit its widest point since the aftermath of Lehman Brothers’ collapse in 2008, with US rates 55.7 basis points higher.

The question now is how the HKMA will manage its defence of the peg if the currency nears the weaker edge of its permitted range between HK$7.75 and HK$7.85. With $400bn in its reserves, there are the funds available and few, if any, expect the peg to be seriously threatened. The HKMA does not technically have to wait until the limit is breached to sell dollars — and it might do so sooner if it feels that will help ease any market jitters. But the problem might be those markets themselves. Years of easy money and record house prices risk having bred complacency. Back in 1983, Hong Kong’s traders were used to uncertainty and expensive money. Those today are not, but they might want to have a think about what that looks like.

jennifer.hughes@ft.com