Hong Kong Liquidity Crisis Near Decade Highs As Capital Flight Accelerates

As Hong Kong’s protest-pummeled streets increasingly resemble a warzone, and its economy collapses, there is another, very ominous signal coming from the banking system.

As Bloomberg reports, cracks are starting to emerge in Hong Kong’s currency and money markets, as traders speculate the local dollar’s resilience to increasingly violent protests won’t last.

While Hong Kong stocks were already showing pain…

Source: Bloomberg

Now, liquidity conditions in the FX market are the tightest since the late 1990s, or the aftermath of the Asian financial crisis.

Source: Bloomberg

An increase in this gauge – resulting from a short-term drainage of cash – coupled with a weaker spot rate “signify an increase in risk-aversion to Hong Kong dollar assets,” Chun Him Cheung, a strategist at Morgan Stanley, wrote in a note.

Additionally, signaling as the chart below shows that traders are aggressively betting on notable weakness in the Hong Kong Dollar in the short-term…

Source: Bloomberg

Amid all of this liquidity chaos, the one-month Hong Kong Interbank Offered Rate (HIBOR) soaring 100bps this week to hit 2.75% on Thursday, not too far off a decade-high of 2.99% marked in July when protestors occupied the city’s legislature.

Source: Bloomberg

Some have suggested that this sudden cash shortage is due to Alibaba Group’s $13.4 billion Hong Kong listing hoovering up cash temporarily:

“Timing wise, it’s not good for the liquidity to get sucked out of the system as there’s a bit of capital outflow happening due to the protests,” said a Hong Kong-based senior banker at a European bank, who asked not to be identified.

However, the move has been going on for months as the protests escalated and given the massive divergence between US-HK borrowing rates (and the huge implicit carry that would provide), it is shocking that the HKD remains so weak…

Source: Bloomberg

In fact, this divergence is a strong signal that this liquidity crisis much more about capital flight (and total risk aversion) than any short-term cash needs for an IPO.

“In contrast with the situation in July, August, the Fed has already cut twice but local rates are driving higher still. Capital outflow concerns seem pretty severe,” said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

While, the Hong Kong Monetary Authority is desperately attempting to play down any fears of a run, saying in late October that there was no obvious capital outflow from its banking system, the above shifts in the short-term money-markets suggests otherwise, and Goldman Sachs has estimated that Hong Kong may have lost as much as $4 billion in deposits to rival financial hub Singapore between June and August alone.

The aggregate balance, a gauge of banks’ cash balances with the HKMA, is down 87% from its 2015 high of HK$426 billion.

Source: Bloomberg

If nothing else, this is a massive distraction for Xi and he purportedly attempts to squeeze Trump in the trade deal discussions.