Hong Kong Monetary Authority Explains Drop In Forex Reserves As Classification Issue

Hong Kong Monetary Authority
A panel outside the Hong Kong Exchanges displays top active securities in Hong Kong (Photo: Reuters / Bobby Yip)

The sharp $15.6 billion-drop in Hong Kong's foreign exchange reserves for the month of August came as a big surprise to investors, most of which had expressed concerns over the reported figures. To quell the rising fears, the Hong Kong Monetary Authority issued a statement on Thursday explaining that the decline in the foreign exchange reserves was mainly due to a "technical classification."

According to the monetary authority, the massive drop did in foreign currency reserve assets does not represent a real change in the amount being held by Hong Kong's de-facto central bank.

Instead, the drop in the figures was apparently due to the massive transfer of funds from the Exchange Funds to other banks in Hong Kong.

The transfer resulted in a significantly higher amount of foreign currency deposits. Under the guidelines of the International Monetary Fund (IMF), foreign currency assets deposited at local banks are not classified as reserves. The total amount of reserves basically stayed at the same levels, but some of it was just differently classified.

On the agency's published data for the month of August, foreign exchange reserves had fallen from a record high of $448.4 billion in July to just $432.8 billion last month. The reported $15.6 billion-drop was the largest decline ever recorded since the agency began publicly publishing its data in 1997. This obviously concerned some investors who were not aware of the reclassification of some of the funds.

The Hong Kong Monetary Authority reassured the public that the city's foreign exchange reserves have remained stable and the total amount of foreign currency assets was still intact. Despite its reassurance, some analysts have protested over the agency's move to transfer assets to local banks. Some have argued that the transfers should have been recorded as a capital outflow transaction under its report's balance of payments.

To fully see the bigger picture of the transfers, analysts would have to wait for the release of the agency's quarterly balance of payment data. The monetary authority is expected to release its second-quarter balance of payments data in mid-September.

The "technical classification" explanation did not sit well with some economists, who feared that the city was experiencing serious capital outflows. DBS senior economist Nathan Chow mentioned that reporting a drop in foreign exchange reserves will make it look like the city now has less money. This, of course, shouldn't really be the case given the recent recovery in the city's stock market and its local currency.

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