Financial Times December 7, 1999
HONG KONG RAISES EURO RESERVES By Peter Montagnon and Rahul Jacob in Hong Kong
Hong Kong, one of the world's largest holders of foreign exchange, has become a buyer of euros for its reserves despite the currency's slide in foreign exchange markets.
Joseph Yam, head of the territory's monetary authority, said the euro's weighting in the reserves would rise to 15 per cent from 10 per cent because of worries about the US balance of payments deficit and stretched equity values on Wall Street.
"I'm afraid more and more people are focusing on the vulnerability of the US market and will start moving out," Mr Yam said in an interview with the Financial Times.
The disclosure came as the euro, which last week dipped below parity with the US dollar, staged a rally of more than two cents on Monday to close in Europe at $1.023. Traders who had sold the currency were forced to buy it back to cover their positions after an unexpectedly strong 3.2 per cent month-on-month rise in German manufacturing orders in October.
Economists said there might be more encouraging figures from Europe today when Germany releases unemployment data for November and gross domestic product for the third quarter. Hong Kong's move contrasts with previous reluctance by central banks to hold the euro in their reserves.
Mr Yam said some of the HKMA's reservations had eased. "I'm less concerned about the liquidity of the euro market than I was at the beginning of the year." He was also unperturbed by Germany's rescue of the Holzmann construction group, which was seen as too interventionist by some dealers.
Financial markets will closely watch today's opening session of a congress of Germany's ruling Social Democrats to see if Chancellor Gerhard Schröder comes under more pressure from the party's left wing to pursue less market-oriented policies.
"I don't think there's any change in the underlying policies of the EU," Mr Yam said. Hong Kong's shift would simply restore the weighting of the euro in the reserves to neutral.
It would only affect the portion equivalent to some $30bn of reserves which the authority manages directly, implying total purchases of around $1.5bn of euros. Outside investment advisers, who manage a further $30bn in reserves on a discretionary basis for Hong Kong, remained underweight in euros, while Hong Kong also has to set aside an additional portion of its total $90bn in reserves in dollars as backing for its currency.
Mr Yam said Asia was looking at ways of monetary collaboration that would help protect smaller open economies like that of Hong Kong from unwanted currency flows. But the prospect of monetary union was a "political non-starter".
Instead, one way of dealing with the problem would be to denominate more financial market transactions, such as trading of mainland Chinese shares in Hong Kong, in US dollars or other currencies, he suggested.
This would shield smaller currencies but it would also require more investment in market infrastructure such as settlement systems. Mr Yam added that the Asian economic crisis had convinced him there was "no alternative" to Hong Kong's currency peg. "If anything it has strengthened our resolve."
Additional reporting by Tony Barber in Frankfurt