Hong Kong has not seen capital outflows amid the current interest rate rise cycle, with total deposits at local banks increasing over the 14-month period, according to Hong Kong Monetary Authority CEO Eddie Yue Wai-man.

Yue said while the series of US interest rate rises since March last year has seen many investors shift their Hong Kong dollar assets in Hong Kong over to US dollar ones to earn a higher interest rate, the money has not in many cases actually left the Hong Kong capital market.

“Funds that flow out of the Hong Kong dollar and are converted into other currencies (such as US dollars) may still stay in Hong Kong’s financial system,” Yue said in an article posted on the HKMA website on Wednesday, just hours ahead of a further expected hike in US interest rates of 25 basis points, which would be the tenth rate rise in 14 months.

“A useful indicator is the overall deposit level of the Hong Kong banking system,” said Yue. Total deposits in the Hong Kong system have remained stable during the current rate rise cycle, he said.

“The deposit amounts have grown by 1.4 per cent from the end of April last year to the end of March this year, suggesting that outflows from the Hong Kong dollar system do not necessarily mean capital is leaving Hong Kong’s financial system.”

Yue also played down worries over a series of HKMA interventions to defend the peg over the period, which has seen the aggregated balance – the sum of balances of banks’ clearing accounts kept with the HKMA – fall to its lowest level since November 2008.

Hong Kong’s monetary policy has been run in lockstep with the US Federal Reserve since 1983 to maintain the local currency’s peg to the US dollar. A trading band of between 7.7500 and 7.8500 was added in 2005, requiring the HKMA to step into the currency market every time the local currency strengthens or weakens beyond the range.

Hong Kong’s currency has weakened against the US dollar in recent months due to the so-called carry trade, where arbitrageurs borrow at low rates to invest in higher-rate markets to pocket the difference. Every time a carry trader sells the Hong Kong dollar, it drives the local currency towards the weaker end of the trading band.

Arbitrage has boomed as the gap between Hong Kong’s rates and the US benchmark widened to 200 basis points last month from near parity in November.

To defend the peg, the HKMA has bought almost HK$289 billion Hong Kong dollars and sold an equal amount of US dollars in 48 interventions over the past year, draining its aggregate balance from HK$337.6 billion at the end of April 2022 to about HK$49 billion in April 2023.

Yue said the aggregate balance only reflects a small portion of total liquidity in the banking system, adding that it remained below HK$10 billion for long periods before 2008. “Even at these levels, day-to-day and interbank settlement activities are operating in a smooth and orderly manner.”