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Hong Kong releases up to HK$300 billion in city's version of quantitative easing to bolster economy against downturn

Enoch Yiu and Peggy Sito enoch.yiu@scmp.com, peggy.sito@scmp.com

Hong Kong's monetary authority said it would cut the amount of capital that banks need to set aside, in the first reduction of the ratio since 2015 to release cash into the financial system to bolster it against any impact from political risks and the city's unprecedented civic unrest.

The city's countercyclical capital buffer (CCB) will be reduced to 2 per cent effective immediately, from the previous 2.5 per cent, according to a statement by the Hong Kong Monetary Authority (HKMA).

"Economic indicators and other relevant evidence have signalled that the economic environment in Hong Kong has deteriorated significantly since June 2019," the monetary authority's Chief Executive Eddie Yue said. "Lowering the countercyclical capital buffer at this juncture will allow banks to be more supportive to the domestic economy and help mitigate the economic cycle."

The cut will release between HK$200 billion and HK$300 billion (US$38 billion) into Hong Kong's economy, according to Yue's blog. The local economy is on track towards a technical recession in the fiscal third quarter ending in December, as four months of street protests had driven away visitors, crimped retail sales and cause property prices to slide.

The HKMA defines its buffer as a mechanism to build up additional capital during periods of excessive credit growth when risks of system-wide stress are observed to be growing markedly. This capital can then be "released" when the credit cycle turns to absorb losses and enable the banking system to continue lending in the subsequent downturn, according to its website.

The move comes as the city's financial system had been buffeted by a combination of the year-long US-China trade war, and the unprecedented mayhem and violence in the city's street protests. The Hong Kong dollar, which had been pegged to the US dollar for 36 years, has also withstood speculative short sellers who are gunning for it to weaken.

"The HKMA's decision to relax the capital requirement is a very much-needed measure at the current economic situation," said Chan Tze-ching, senior adviser of Bank of East Asia, adding that the move is akin to Hong Kong's version of quantitative easing. "This measure will allow banks to reduce the capital [locked up] and they can lend more money to support the real economy."

The local currency had not touched the lower end of the trading band of between 7.7500 and 7.8500 per US dollar in the four months since an estimated 1 million people first took to the streets to protest against a controversial extradition bill. Even though the city's chief executive said she would withdraw the bill, protests had persisted, descending into almost daily bouts of vandalism and violence.

To be sure, Hong Kong's financial system and its currency peg are well protected from short sellers' attacks, with the city's Exchange Fund - set up as a war chest against speculators - standing at a record HK$4.14 trillion (US$527.7 billion).

The size of the Exchange Fund grew by 0.02 per cent, or an increment of HK$700 million, to HK$4.138 trillion at the end of July, bolstering the city government's defences against hedge funds that are eyeing a chance to short-sell the local currency amid slower economic growth and the year-long US-China trade war.

The move "will give banks more room to play a supportive role to help the local economy, particularly towards the small and medium enterprises, reduce the pressure of an economic downturn," said Mary Huen, chairwoman of the Hong Kong Association of Banks (HKAB), in a statement.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.