Overseas Capital Bet On The Rise Of The Hong Kong Dollar, Abandoning The Bet On A Sharp Appreciation Of The RMB

The influx of southward capital into Hong Kong stocks is unexpectedly boosting the bullish sentiment of the Hong Kong dollar.

As of 20:00 on January 20, the exchange rate of the Hong Kong dollar against the US dollar hovered at 7.7512, just one step away from the mandatory convertibility guarantee upper limit of 7.75.

"With the recent rebound in the US dollar index, the strength of the Hong Kong dollar exchange rate is largely due to the continued influx of southward capital, which has boosted the demand for Hong Kong dollar." A Hong Kong local hedge fund manager said to reporters. As a matter of fact, the influx of southward funds has driven Hong Kong stocks to record new highs in the year, which has also attracted a large number of overseas funds to Hong Kong stocks to share the rising dividends, thus increasing the demand for Hong Kong dollar and the exchange rate of Hong Kong dollar.

He told reporters that during this week's three consecutive trading days, when the net inflow of funds from the South exceeded HK $20 billion, many large European and American hedge funds also substantially increased their positions in leading stocks of Hong Kong stocks, technology sector and red chip sector, with an increase of more than US $50 million.

In the view of the Hong Kong hedge fund manager, this has inspired many investment institutions to buy up the Hong Kong dollar arbitrage enthusiasm. Since this week, a number of overseas investment institutions have bought highly leveraged Hong Kong dollar call option derivatives with strike prices of 7.75, betting that global capital inflow into Hong Kong stocks will continue to push up the Hong Kong dollar exchange rate.

It is worth noting that although the market is bullish and the Hong Kong dollar is expected to rise, the exchange rate of the Hong Kong dollar against the RMB appears to be stable. As of 20:00 on January 20, the exchange rate of Hong Kong dollar against the US dollar was hovering around 0.8338. Since January 5, the exchange rate of Hong Kong dollar against RMB has continued to fluctuate within a narrow range of 0.8288-0.8375.

In the view of many foreign exchange traders of banks, behind this is the mild rise in the exchange rate of RMB against the US dollar since January, which has offset the rise of Hong Kong dollar against the US dollar, thus keeping the Hong Kong dollar stable against the RMB.

"It is worth noting that with the continuous influx of southward funds into Hong Kong stocks, many overseas investment institutions realize that cross-border flows of China's capital account are more balanced, and their bets on the sustained unilateral and substantial appreciation of the RMB are also ebbing." Aaron Kohli, strategist at BMO capital markets, a hedge fund, stressed to reporters.

Hong Kong dollar boom

In the view of the local hedge fund managers mentioned above, the recent influx of southward funds into Hong Kong stocks has also given many Hong Kong local hedge funds and overseas investment institutions the opportunity to gain profits by buying up Hong Kong stocks and Hong Kong dollar at the same time.

"Since this year, the net capital inflow of Hong Kong stock connect to the South has reached HK $205.6 billion, accounting for about 30% of the total net inflow of HK $672.1 billion last year, which is enough to affect the exchange rate of the Hong Kong dollar." He thinks. The reason is that their investment model estimates that the total balance of Hong Kong banks is about HK $250-300 billion. Therefore, the demand for Hong Kong dollar exchange brought by such a large influx of southward capital is enough to make the Hong Kong dollar exchange rate continue to rise despite the rebound of the US dollar, thus forming new arbitrage opportunities for buying up the Hong Kong dollar.

A number of Hong Kong securities dealers said that since the cross-border capital flow of Hong Kong stock connect is a closed-loop operation, the southward inflow of capital may not lead to the tight liquidity of Hong Kong dollar and the sharp rise of Hong Kong dollar interbank offered rate. At present, the Hong Kong dollar interbank offered rate (HIBOR) has generally remained stable, and it seems that it has not been impacted by the large influx of southward funds.

"Taking into account the strong positive correlation between the rise of Hong Kong dollar interbank offered rate and the strength of the Hong Kong dollar exchange rate. Therefore, there is no small risk for overseas investment institutions to bet heavily on the rise of the Hong Kong dollar without the cooperation of the former. " A Hong Kong securities trader told reporters.

The head of a US hedge fund manager in Hong Kong said frankly that they didn't care. Because they have another profit calculation - with the influx of southward capital pushing up the valuation of Hong Kong stocks, the strong money making effect will drive more and more overseas capital into Hong Kong stocks to share the rising dividends, and will also drive the Hong Kong dollar exchange rate higher.

Many reporters have learned that at present, many European and American quantitative investment hedge funds have adjusted the Hong Kong dollar exchange rate investment model, that is, substantially increased the weight of southward capital inflow and the rise factor of Hong Kong stocks. This is because as long as the inflow of southward capital makes Hong Kong's stock market record high, it will attract more global capital to enter, thus continuously pushing up the exchange rate of the Hong Kong dollar.

A Hong Kong Bank foreign exchange trader also told reporters that many global investment institutions are optimistic about the continued strength of the Hong Kong dollar. On the one hand, they believe that the recent US dollar rebound will come to an end with the smooth change of the US regime and the new government's economic policies becoming clearer; on the other hand, the money making effect brought about by more and more southward capital inflows and the rise of Hong Kong stocks is making more and more global investment institutions pay attention to this undervalued capital market, thus pushing the Hong Kong dollar to reach the upper limit of mandatory convertibility soon 。

"Although the rise in the exchange rate of the Hong Kong dollar is very small, we can buy up the Hong Kong dollar through 50-100 times of high leverage, or bet on the occurrence of small probability events such as short-term Hong Kong dollar touch 7.75 through option products, and we can also obtain considerable investment returns." He pointed out.

Help balance capital flow?

The large influx of southward funds into Hong Kong stocks also makes the mirror relationship of China's balance of payments more obvious.

Specifically speaking, in recent years, China's current account shows a surplus, and the non reserve financial account shows a deficit; on the contrary, the current account deficit, the non reserve financial account will show a surplus, making China's balance of payments tend to be self balancing.

The reporter has learned from many sources that, with the good data of China's foreign trade surplus in the past two months, many overseas investment institutions have paid close attention to whether the "deficit" of China's non reserve financial accounts has narrowed (or even turned into a surplus), so as to serve as the main basis for them to continue to buy and increase the RMB exchange rate on a large scale.

"With the continuous influx of southward funds into Hong Kong stocks, many overseas investment institutions have realized that the mirror relationship of China's balance of payments is still relatively stable, and began to abandon their bets on the substantial appreciation of the RMB." Aaron Kohli told reporters.

A number of Hong Kong hedge fund managers disclosed to reporters that since this year, the influx of southward funds has indeed made many overseas investment institutions reduce their long positions in RMB. The reason for this is that they believe that the southward inflow of capital is a new measure for the relevant departments of China to further strengthen the interconnection of domestic and foreign financial markets, so as to ease the pressure of RMB appreciation.

As of 21:00 on January 20, the offshore RMB / USD exchange rate was at 6.4721, slightly lower than the onshore RMB / USD exchange rate of 6.4692, indicating that foreign capital's bets on the bullish RMB exchange rate are continuing to fall.

Recently, the influx of southward capital into Hong Kong stocks has also made the cross-border flow of capital in China tend to be balanced, which also helps the RMB exchange rate tend to be two-way fluctuations in a reasonable range.

"With the prospect of China's economic recovery is good, the market generally expects that the scale of overseas capital to increase its holdings of China's bond stocks will still exceed 100 billion US dollars this year. Therefore, on the one hand, China needs to increase foreign direct investment, on the other hand, it needs to further expand the interconnection channels of domestic and foreign financial markets, guide domestic funds to go out in compliance with the regulations and diversify investment, so as to ensure the cross-border capital flow However, maintaining balance will guide the financial market to enhance the expectation of RMB's two-way fluctuation. " According to Aaron Kohli. Recently, a large influx of southward funds into Hong Kong stocks is effectively alleviating the net inflow of capital account and the sharp unilateral appreciation pressure of RMB caused by the continuous increase of hedging foreign capital positions in RMB assets.

The reporter found that the southward capital of Hong Kong stock connect is playing an increasingly important role in maintaining the balance of cross-border capital flow in China. In the first nine months of last year, foreign investors increased their holdings of domestic bonds and stocks to US $132.1 billion. During the same period, China's capital flow remained balanced. On the one hand, China's outward direct investment reached 78.9 billion US dollars, on the other hand, domestic investors bought 424.4 billion yuan of Hong Kong shares (about 62 billion US dollars) through the Hong Kong stock exchange.

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