Hong Kong to Tap Peg Defense Fund for First Time in 40 Years

Hong Kong is planning for the first time in 40 years to tap the fund that ensures the stability of its currency peg, in part to help finance the development of a technology hub on the border with China.

At an annual budget presentation on Wednesday, the government said it would withdraw HK$150 billion ($19 billion) after a record-breaking year for the Exchange Fund , which serves as the last line of defense to maintain the Hong Kong dollar’s peg against the US currency.

The withdrawal, if approved by an advisory committee, would be the first since 1984. The money will be transferred to the Capital Works Reserve Fund to support development of the Northern Metropolis and other infrastructure projects in the coming two years, according to the government.

The HK$4.1 trillion fund works as a backstop for the city’s currency peg to the US dollar and is a key feature of Hong Kong’s role as an international financial hub and gateway to China. The city last year was forced to buy and sell billions of Hong Kong dollars to defend the peg because of unprecedented swings.

By law, the Exchange Fund must maintain of assets against debt when making transfers. The current level of foreign reserves was about 1.6 times of the monetary base, which is sufficient to ensure stability after the payout, government officials said at a budget briefing on Wednesday. They asked not to be named.

An inquiry was sent to the Hong Kong Monetary Authority.

The fund had a record gain of HK$331 billion last year, helped by rising global markets. It has an average yearly income of about HK$98 billion since 2001.

The Northern Metropolis project was announced five years ago by former Chief Executive Carrie Lam to help the city rebound from the protests and the pandemic. Current leader, John Lee, last year vowed to speed up development of a cross-border tech hub with China as the Asian financial center searches for new growth drivers.