In recent times, major banks in Hong Kong have been observed aggressively seeking foreign currency deposits, with some banks offering up to 13.9 percent annual interest rates on one-week foreign currency fixed deposits. The latest offerings, contrary to the previous requirement that high-interest fixed deposits must be funded by new capital, reflect the banks’ urgent need for foreign currency deposits.
The Epoch Times visited HSBC (00005) branches and found that short-term one-week foreign currency fixed deposit rates have risen across the board. The one-week rate reached 12.5 percent p.a. for the pound sterling, 12 percent for the Australian dollar and Canadian dollar, and 8 percent for the U.S. dollar. However, the three-month fixed deposit rate for the U.S. dollar was 3.9 percent.
HSBC required high-interest deposits to be funded by new capital a few weeks ago. Nevertheless, when The Epoch Times reporter visited on March 14, the bank’s staff members indicated that existing account holders could directly convert Hong Kong dollars into foreign currency, with a minimum threshold as low as US$2,000. The website displayed high interest rates that were available until the end of March.
Hang Seng Bank (00011), which belongs to the same group as HSBC, introduced a plan to raise interest rates for foreign currency deposits in the first quarter of 2024. For foreign exchange transactions of above HK$10,000 through Hang Seng, the one-week annual interest rate for the Canadian dollar, yuan, pound, and Australian dollar is 13.9 percent, and the annual interest rate for U.S. dollar one-week fixed deposits is 10.9 percent.
Standard Chartered Bank (02888) also has similar arrangements for short-term high-interest foreign currency deposits on its website. For instance, southbound cross-border funds from yuan to U.S. dollar, with a deposit of Hong Kong dollar equivalent of over HK$100,000 for one month, enjoy an interest rate of 10 percent p.a.
ICBC Asia also launched high-interest foreign currency deposits for cross-border southbound funds during the same period, offering a 10 percent annual interest rate for deposits of US$1,000 or more for one month.
The sudden offering of high-interest foreign currency deposits by major banks reflects a certain level of tightness in Hong Kong banks’ short-term foreign currency funding.
According to data from the Hong Kong Monetary Authority (HKMA) as of January, deposits in both Hong Kong dollars and U.S. dollars have declined (See chart below). Hong Kong dollar deposits decreased slightly by 0.3 percent to HK$ 7.6 trillion monthly, while U.S. dollar deposits saw a more significant decline, dropping by 1.16 percent to HK$6.37 trillion monthly (HKMA figures in Hong Kong dollars), resulting in a 0.59 percent monthly decrease in total deposits. Total deposits fluctuated from a peak of HK$15.39 trillion in February 2023 to a historic high of HK$16.22 trillion in December 2023, before falling back from the high level in January 2024.
Stephen Yim, former head of i-CABLE Finance Info Channel, said that due to the decline of interbank offered rate in Hong Kong, the interest rate for Hong Kong dollar deposits had fallen below 4 percent, leading to an increase in foreign currency deposits compared to Hong Kong dollar deposits.
However, HKMA data shows that foreign currency deposits decreased by 0.8 percent in January, reflecting a decrease in foreign currency deposits. One interpretation is that foreign capital may start to withdraw from Hong Kong, causing a decrease in foreign currencies, especially U.S. dollars, in the Hong Kong banking system, a trend that needs to be closely monitored.
The January decline is not due to seasonal reasons. Data shows that Hong Kong dollar and foreign currency deposits increased in January over the past three years. In addition, Hong Kong dollar deposits decreased by 0.64 percent annually, while foreign currency deposits increased across the board annually. This shows that some of the increase in foreign currency deposits comes from the conversion of local Hong Kong dollars.
Traditionally, official statistics do not deliberately track fund flows. In addition to deposit balances, the balance of the banking system published by the HKMA is also used as one of the indicators. In 2021, the deposit balance reached a peak of HK$457.5 billion, followed by a decline from 2022 to 2023. The latest figures from the HKMA show that as of March 12, it had fallen to HK$447.81 billion.
According to the HKMA’s definition, the figures reflect the balance of funds after daily settlement and exchange and do not fully reflect fund flows. However, after the United States implemented quantitative easing policies in 2008, the balance of the banking system in Hong Kong increased significantly, reflecting the level of speculative capital activity in Hong Kong.
Nevertheless, since the beginning of 2024, the balance of the banking system has been hovering at a low level of HK$450 billion, which does not directly explain the current situation of banks aggressively seeking foreign currency deposits.
Another indicator is the Hong Kong dollar exchange rate against the U.S. dollar. Hong Kong maintains a linked exchange rate system, with the HKMA guaranteeing an exchange rate band of HK$7.75 to HK$ 7.85 per U.S. dollar. During the Zero-COVID period in 2022, the Hong Kong dollar has been on the weaker side, close to HK$7.85 for a long period of time, with short periods of Hong Kong dollar strength in December 2022, August 2023, and November 2023. Nonetheless, the Hong Kong dollar has also been at a level higher than 7.8 for longer periods of time, and was last quoted at HK$7.824 by press time.
A similar situation occurred from 2016 to 2018 when the Federal Reserve started to raise interest rates from its zero interest rate policy. The Federal Funds target rate was capped at a maximum of 2.5 percent, and the Hong Kong dollar touched the weak-side Convertibility Undertaking on a number of occasions.
Since 2024, the Hong Kong dollar exchange rate has tended towards the weaker side, reflecting some outflow of funds. “It may reflect a decrease in foreign currencies, especially U.S. dollars, in the balance of the banking system, so we see such arrangements by banks,” said Stephen Yim.
Mr. Yim further pointed out that since 2024, the Hong Kong dollar exchange rate has been leaning towards the weaker side, indicating a certain outflow of funds.
“This may indicate a decrease in foreign currencies, especially U.S. dollars, in the balance of the banking system, which is why we see such arrangements by banks,” he said.
In addition to the suspected withdrawal of capital, which led banks to scramble for foreign currencies, banks have also been offering short-term high-interest Hong Kong dollar deposits, which may be related to banks’ efforts to maintain sufficient funds.
In this year’s budget, the Financial Secretary instructed the HKMA to advise banks to be tolerant of enterprises’ Call Loans (early repayment). However, Vincent Cheng, chairman of the Hong Kong Greater China SME Alliance, said in a TV program that 20 to 30 percent of enterprises made repayments but were still asked by banks to repay early since the value of collateral has fallen.
Chow Kwok-keung, chairman of the Hong Kong Taxi and Public Light Bus Association, said that more than 100 light buses will continue to be towed away in the future. In December 2023, the Hong Kong media reported that the HKMA had met with senior executives of medium-sized banks and predicted that the non-performing loan ratio would rise to 2 percent, urging Hong Kong banks to increase provisions for non-performing loans in the face of a crisis in property debt and consider accelerating the disposal of problematic assets.
In general, offering high interest rates to attract depositors is only a means for banks to attract customers. Hong Kong has abundant capital and the deposit interest rate has always been on the low side. In addition, Jerome Powell, chairman of the Board of Governors of the Federal Reserve System, pointed out in a congressional hearing that interest rates might start to be cut this year. With the interest rate reduction cycle imminent, banks do not need to charge high interest rates to attract customers.
Over the past six months, stock markets have risen globally, while the Hong Kong stock market fell to a low level. If there is a lack of new foreign capital, there will only be a pattern of Hong Kong dollar and foreign-currency deposits prevailing over each other. Once the situation of using high interest rates to grab customers continues, it may reflect a bigger economic problem.
