(Yicai Global) April 17 -- Cash levels in Hong Kong’s banking system have plunged to the lowest level in three years as the special administrative region’s monetary authority buys up Hong Kong dollars from the interbank market to prop up the sliding exchange rate.

Hong Kong’s aggregate balance, a measure of the amount of cash in the banking system, was HKD57.2 billion (USD7.2 billion) as of April 14, a drop of 85 percent from the high of HKD461.7 billion (USD58.8 million) in 2021 and close to the 2020 low of HKD54 billion, according to media reports.

The Hong Kong monetary authority is buying Hong Kong dollars from banks and selling the greenback to steady the exchange rate, as multiple interest rate hikes by the US Federal Reserve put its currency under pressure.

The authority bought HKD20 billion (USD2.6 billion) this month to stabilize the Linked Exchange Rate system and keep the Hong Kong dollar stronger than 7.85 to the US dollar.

As the regulator purchases Hong Kong dollars, the exchange rate should stay between 7.75 and 7.85 to the greenback, Xia Chun, director of the finance research institute under Yintech Investment Holdings, told Yicai Global.

Banks’ cash levels are just the first layer of protection to defend the exchange rate, and it will not be a disaster even if cash levels drop to zero because there are still second and third layers of protection, Xia said.

The second layer is US dollar-denominated exchange fund bills and bonds held by banks, and the third layer is the special administrative region’s USD430 billion foreign exchange reserve and China’s USD3 trillion foreign exchange reserve, he added.

Hong Kong banks had around HKD1.3 billion (USD165.6 million) in cash during the US interest rate hike cycle of 2004 to 2006, just 2 percent of the level now, and the LERS was still safe, he said.

No Sign of Large Inflows

Earlier rumors that hundreds of billions of US dollars were flooding into Hong Kong from Western countries after the collapse of Silicon Valley Bank and the takeover of Credit Suisse Group is probably untrue, given the cash levels in the banking system, Xia said.

“We haven’t seen a lot of money coming from Western countries,” client managers at foreign banks told Yicai Global. But there is rising demand from mainland customers to open bank accounts in Hong Kong now that the border has reopened and business with the mainland is getting back to normal, they added.

Hong Kong dollar-denominated deposits nudged up 0.3 percent in February from a year ago and US dollar-denominated deposits climbed 3.5 percent, while other foreign currency deposits fell 10.5 percent.

Editor: Kim Taylor