Hong Kong Exodus Could Spur $36 Billion in Outflows, BofA Says

An angler fishes as buildings stand across the Victoria Harbor in Hong Kong, China, on Wednesday, July 15, 2020. Hong Kong implemented its strictest suite of social distancing measures yet as the Asian financial hub looks set to be the first in the region where a new outbreak surpasses previous waves in severity.
An angler fishes as buildings stand across the Victoria Harbor in Hong Kong, China, on Wednesday, July 15, 2020. Hong Kong implemented its strictest suite of social distancing measures yet as the Asian financial hub looks set to be the first in the region where a new outbreak surpasses previous waves in severity.

(Bloomberg) -- Hong Kong could see capital outflows of as much as $36 billion this year as residents leave the city for the U.K. in response to China’s sweeping security law, keeping the local dollar off the strong end of its trading band with the greenback.

That’s according to a study by Bank of America Corp. More than two-thirds of the city’s population would be eligible for a path to British citizenship, according to the U.K government, which has offered the immigration route in its response to the law that was rapidly enacted in the former British colony last summer. The route is due to officially open at the end of this month. This year 153,300 people could relocate to Britain, strategist Chun Him Cheung wrote in the note this week, with the estimate based on U.K. government data.

If those leaving sold an apartment for HK$7.3 million ($942,000) -- the average cost of a 500-square-foot flat in the city’s Kowloon district -- and withdrew their pension savings, the outflow this year could reach HK$280 billion, said Cheung. That’s equal to half the net inflow into the city in 2020, he said, adding that the number of people leaving for the U.K. could reach 321,600 through 2025.

Such capital outflows would likely push the Hong Kong dollar away from 7.75, the strong side of its currency peg with the greenback. However, a U.K. migration wave would not be enough alone to push it to the weak side of the band at 7.85 per U.S. dollar, the note said, citing previous instances of mass emigration that didn’t trigger systematic events for Hong Kong’s currency regime.

Part of the impact will be offset by large inflows driven by Chinese companies listing in Hong Kong, which helped boost the currency in 2020. That would keep the local dollar close to 7.75 per greenback, despite the emigration trend, wrote Cheung. Local interbank rates would also not be materially impacted given the city’s liquidity in the form of its large aggregate balance, the note said.

The Hong Kong dollar has been resilient during a year in which the recession-hit city has faced the impact of the pandemic and worries over the national security law imposed by Beijing. It has eased away from the strong end of its peg after Hong Kong’s de facto central bank intervened multiple times in 2020 to prevent it from strengthening past 7.75. It last traded at 7.7532 per dollar.

​China has criticized the U.K.’s move to invite more Hong Kong residents to its borders as an inappropriate interference in the country’s domestic affairs.