Hong Kong stock rally seen immune to currency drop

Bloomberg

The Hong Kong dollar may be sliding into the weak end of its trading band, yet money managers see no reason for stock investors to turn bearish just yet. Unlike previous bouts of weakness in the pegged currency — when fears of a Chinese hard landing sent capital fleeing the city’s equities — this time around there’s plenty of liquidity in the system, and no shortage of buyers. Foreign and mainland Chinese investors alike have been piling into Hong Kong-listed shares, lifting the benchmark index to a two-year high last week, even as the local currency retreated to a 17-month low.
At the heart of the divergence is a widening gap between lending rates charged in Hong Kong and the US, which is spurring demand for the greenback. With the Federal Reserve expected to boost borrowing costs this week, the premium on Libor — the one-month US interbank rate — over Hong Kong’s Hibor rate has swelled to more than 75 basis points, the most since December 2008.
“Hong Kong’s fundamentals and sentiment remains positive so fund flows will still likely continue,” said Kenny Tang, vice chairman at Jun Yang Financial Holdings Ltd. “Liquidity in the Hong Kong market remains strong.” While Moody’s Investors Service reduced Hong Kong’s credit rating last month, the city’s economy is growing at its fastest pace since 2011 and home prices are surging to new records.