Global investors rattled by the US under the Trump administration are turning to Hong Kong for a sweet deal: borrowing Hong Kong dollars at virtually zero cost and receiving a guaranteed return of more than 4%, based on US overnight lending rates.
The so-called carry trade, which came under the spotlight over the past month as borrowing costs in Hong Kong plunged to nearly zero in a matter of days, highlights just how quickly the Asian financial hub is bouncing back from its recent slump, as money pours into the former British colony and demand for US assets falls in Trump’s second term.
One major reason for the flood of liquidity has to do with the city’s decades-old policy of pegging the Hong Kong dollar to its US counterpart since 1983. Under the linked exchange rate system, Hong Kong’s currency has traded between HKD 7.75–7.85 against the US dollar.
As the greenback weakened abruptly in April after Trump unveiled “reciprocal” tariffs, Hong Kong’s de facto central bank intervened repeatedly, pumping more than HKD 100 billion (USD 12.7 billion) into the financial system to prevent its currency from strengthening beyond HKD 7.75 to the US dollar, the upper limit of its trading band.
As a result, the one-month Hong Kong interbank offered rate (HIBOR), a measure of funding costs in the banking system, dropped from 4.07% on April 29 to 1.57% within two weeks, the fastest decline since the 2008 global financial crisis. It fell further to 0.53% on June 20.
Meanwhile, the 30-day average secured overnight financing rate (SOFR) in the US only edged down from 4.35% on April 29 to 4.3% on June 18.
“Suddenly it became an effective massive rate cut in the Hong Kong interbank rates,” said Ju Wang, head of Greater China FX and rates strategy at BNP Paribas, “The almost risk-free carry trade started to return to the market.” The injected liquidity has taken the territory’s currency to the weaker end of the trading band, close to HKD 7.85 to the greenback.
There are some early signs that such lucrative trade may not be possible for long. After its currency hit the weaker end of the trading band, the Hong Kong Monetary Authority (HKMA) mopped up some liquidity on June 26 by buying USD 1.2 billion worth of Hong Kong dollars. This threatens to push up local interest rates again and make such bets more costly.
The HIBOR looks to be stable after the intervention. It fell to 0.83% on June 27, after rising to 0.96% the day before.
“We do think (the carry trade) will be tested soon,” Wang added, “but the testing will be very gradual given we remain in a weak dollar environment.”
While previous interventions raised questions about the relevance of the US dollar peg, the arrangement gives Hong Kong an unusual edge amid ongoing tensions between China and the US, per analysts.
“The peg is here to stay and possibly even more so,” said Stephen Roach, a senior fellow at Yale University and former chairman of Morgan Stanley Asia. “As Hong Kong’s future becomes more and more dependent on finance from Greater China, it needs to have an anchor.”
Some investors also believe the band offers stability, in contrast to the big swings in the value of other Asian currencies as the dollar has weakened. In May, the Taiwanese dollar jumped 10% in two days. Currencies in Japan and South Korea have appreciated more than 8% so far this year against the dollar.
“The Hong Kong government’s complete loyalty to the currency band is driving an enormous amount of confidence for international investors,” said Richard Harris, founder and CEO of Port Shelter Investment Management.
In many ways, the unusually wide gap between borrowing costs in Hong Kong and the US, the biggest since 2018 at one point, shows the city’s capital market is regaining its clout after years in the doldrums as Chinese companies and investors shun Trump’s America.
The city is reclaiming the number one spot in global IPOs, driven by a fleet of Chinese companies, including the USD 5.3 billion listing of battery maker Contemporary Amperex Technology (CATL) in May. Investors from mainland China are expected to funnel USD 110 billion into Hong Kong shares via the Stock Connect program this year, one of the largest annual net purchases, according to a forecast by Goldman Sachs.
Yet another driver is the exchange rate system that some believe brings more benefits than drawbacks, such as potentially large swings in the market.
“I think the government is prepared to deal with any volatility without changing the peg,” Yale University’s Roach said.
The HKMA has committed to intervene when the currency moves toward the upper or lower bound, effectively keeping the city’s borrowing costs in lockstep with the US Federal Reserve’s interest rate policy.
As Hong Kong’s dollar rose toward the 7.75 mark in early April, after Trump announced a raft of reciprocal tariffs, the monetary authority took steps to keep the currency stable.
Between May 2–6, it sold HKD 129.4 billion (USD 16.4 billion) and bought USD 16.7 billion in dollars. The sudden influx of money has more than tripled the aggregate balance of the Hong Kong currency—a measure of liquidity in the banking system—to around HKD 174 billion (USD 22.1 billion), the monetary authority disclosed.
“We are constantly stuck between two different themes. One is the de-dollarization trend, and the other is Chinese money flowing to Hong Kong due to lack of assets back home,” BNP Paribas’ Wang said.
Carlos Casanova, senior economist at Swiss bank Union Bancaire Privee, predicted the Hong Kong dollar will likely remain on the weaker side of the trading band as borrowing appetite remains subdued in part due to the tepid housing market.
“There isn’t a lot of demand for loans at the moment,” he said.
While any potential strengthening of the US dollar could force the monetary authority to drain liquidity, putting at risk a rebound in the property market and cooling mainland companies’ desire to list in Hong Kong, few expect adjustments to the currency peg, at least for now.
In early June, Hong Kong’s chief executive, John Lee, pledged to keep the currency’s peg to the US dollar intact and cited the system as “a key success factor” in the region.
“The reason why the peg works so well is also due to the clarity of the signal that the Hong Kong authority is sending to the market,” according to Kelvin Lam, senior China economist at Pantheon Macroeconomics. “If you widen the band, the objectives may not be that clear.”
The broader economic challenges Hong Kong faces could give the authorities reason to keep interest rates lower for longer.
Unlike in 2009 when, a weaker US dollar prompted similar action by the Hong Kong authority to pump liquidity into the market, fueling concerns over asset bubbles, Hong Kong’s economy could now get a boost from lower rates, helping to reinvigorate its sluggish housing market and sectors sensitive to rates, such as banking.
“There is no reason not to peg to a weak currency at a time when the underlying economy is facing deflation,” added Wang of BNP Paribas.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.