'Hong Kong dollar peg at risk' as stocks plunge

The Hong Kong dollar's decades-old peg to the US greenback could be at risk, analysts warned Wednesday, as local stocks took another pummelling in an Asia-wide rout.

Shares on the Hang Seng Index plunged 3.82 percent to end near four-year lows, hit by fears over the health of the Chinese economy and weak oil prices, with mainland-linked chips taking a hammering.

The bourse has slumped almost 14 percent since the start of the year.

The sell-off has put huge pressure on the Hong Kong dollar, which has sunk to its weakest level against the US unit since 2007 as the city's once alluring access to Chinese assets looks less attractive to investors.

This has led to a vicious circle whereby traders are seeing the falling dollar as a sign of capital outflows, which in turn leads them to continue selling stocks and hurting the currency.

"The last few days the weakened Hong Kong dollar is affecting the investment sentiment, people are worrying that funds are going out of Hong Kong markets... that's sending a pretty negative perspective," financial analyst Jackson Wong said.

And Francis Lun, of Hong Kong brokerage GEO Securities told AFP that traders "are speculating the Hong Kong dollar peg may collapse".

"There is a lot of speculative money around the world," he said, but added that the city's government had enough firepower to defend the 32-year-old peg.

The Hong Kong Monetary Authority is obliged to act by buying or selling the local dollar whenever it touches either side of the HK$7.75-HK$7.85 trading band against the greenback.

The HKMA has been forced to intervene to protect the peg on several occasions.

Among the biggest was in July and August 2014 when it stepped in 24 times, injecting a total of $9.7 billion into the financial system as the local dollar surged against the US unit owing to a flood of cash seeking access to China's booming market.

"The Hong Kong dollar is a victim of all the risk aversion across global markets given what's happening with China," DBS Hong Kong managing director for treasury and markets Tommy Ong told Bloomberg News.

However, Ong said the peg is still an attractive alternative.

"I trust that the Hong Kong peg will stay in place because there are no better alternatives given the volatility we've seen with the yuan."

Wong also suggested concerns about the peg were overdone, while the HKMA had not yet intervened.

"We haven't even touched the weak side yet... The HKMA will try to stabilise the Hong Kong dollar and at this point we haven't seen that happening yet, so I do not think this will put any pressure on it," Wong from the brokerage firm Simsen Financial group said.

The HKMA chief executive Norman Chan on Monday again vowed to continue defending the dollar peg.

-- Bloomberg News contributed to this story --