"Quantitative Change Leads to Qualitative Change"

　　Since the second half of the year, the Hong Kong dollar exchange rate has repeatedly touched the weak-side convertibility guarantee, prompting the Hong Kong Monetary Authority (HKMA) to frequently intervene to stabilize it. But why did the most recent intervention cause the largest surge in the exchange rate?

　　"This is quantitative change leading to qualitative change," a senior foreign exchange market analyst told reporters. The recent rapid rise of the Hong Kong dollar is closely tied to the reversal of long positions in carry trades: when the Hong Kong dollar balance falls to a certain level, liquidity is no longer as abundant as before, the cost of Hong Kong dollar funds moves away from zero interest rates, the interest rate differential between the Hong Kong dollar and the U.S. dollar narrows, and the unwinding of carry trades (borrowing Hong Kong dollars and exchanging them for U.S. dollars) leads to an appreciation of the Hong Kong dollar exchange rate.

　　Xie Zhengrong, a researcher at Xingye Southeast Asia Research Institute, told reporters that there is a nonlinear relationship between Hong Kong dollar liquidity, represented by the aggregate balance of banks, and Hong Kong dollar funding rates. Historical data shows that HIBOR only undergoes significant changes when the aggregate balance falls to around HKD 50 billion. As the aggregate balance has declined to current levels, marginal disturbances in liquidity have become the dominant factor affecting Hong Kong dollar funding rates. Therefore, it was only with the recent interventions by the HKMA that Hong Kong dollar funding rates began to tighten significantly.

　　Additionally, the massive southbound capital flows have created strong demand for Hong Kong dollar exchange, becoming another "driver" behind the current rise in the Hong Kong dollar exchange rate. According to a research report by the Financial Markets Department of China Merchants Bank, southbound capital set a historical record on August 15 with a net inflow of nearly HKD 35.877 billion in a single day. The massive "stockpiling" of Hong Kong stocks by southbound capital has driven up demand for the Hong Kong dollar.