Hong Kong Dollar Two Rounds "Strong Side Collision" Panorama Comparison: 2020 vs 2025

Recently, due to the continued weakness of the US dollar and the rising demand for the Hong Kong dollar (exporters selling US dollars, a big year for Hong Kong IPOs, etc.), the surplus of the Hong Kong dollar has continued to decline, triggering the strong side of the Hong Kong dollar. The Monetary Authority needs to continuously buy US dollars and release Hong Kong dollars to maintain the liquidity of the Hong Kong dollar. For specific details, refer to yesterday's article on the surge of emerging currencies, the soaring New Taiwan dollar, and the "dual leverage" crisis in life insurance.

So, what are the similarities and differences between this round of strong side exchange for the Hong Kong dollar and the strong side in 2020?

In 2020, when the Hong Kong dollar triggered the strong side, the Monetary Authority continuously released liquidity in Hong Kong dollars. Of course, against the backdrop of an overall improving domestic economy, from 2020 to 2021, the Hong Kong stock market experienced a rare "Davis Double Play," with the dual benefits of liquidity and a favorable fundamental driving the Hong Kong stock market to achieve brilliance in 2021. Time has passed, and in May 2025, the Hong Kong dollar triggered the strong side again. What does this mean for the Hong Kong stock market this time?

Chart of USD to HKD exchange rate

A panoramic comparison of the two rounds of "strong side" for the Hong Kong dollar: 2020 vs 2025

• 1. Trigger Depth: "Flood-like" multiple vs "Faucet" single point

2020: The strong side CU was triggered continuously 85 times, with an average single injection of only ≈HK$ 4.5 billion; the exchange rate was long pegged at 7.75, with demand coming from continuous IPO placements and southbound northward arbitrage, resulting in a "trickle - normal" demand for the Hong Kong dollar.

2025: On the first day, it hit HK$ 46.5 billion, a scale equivalent to 10 times the daily average of the entire round in 2020, indicating that this time it was a "vacuum suction" from a one-time position closure—high-frequency, arbitrage, and hedging positions withdrew simultaneously.

• 2. Background Comparison: Extremely loose monetary policy vs still high interest rate differentials

In 2020, with zero interest rates and QE, the yields on US dollar assets plummeted. The arbitrage motivation was "borrow USD → buy HK IPO," with a 0.5 pp inversion → borrowing USD to raise the price of the Hong Kong dollar, mainly driven by IPOs and southbound activities, leading to real equity allocation.

In 2025, high interest rates have not fallen, but the weak dollar narrative pressures the DXY; the arbitrage motivation is "covering Hong Kong dollar shorts + selling USD." Hibor is still about 300 bp lower than Fed Funds, with the interest rate differential between Hong Kong and the US converging but not reversing. The main reasons in the foreign exchange market are the depreciation of the US dollar and the closing of arbitrage positions, with asset allocation components being much weaker (the significant recovery of Hong Kong dollar IPOs in 2025 also contributed). Therefore, 2020 was driven by "loose currency + asset allocation," while 2025 seems more like "US dollar position squeeze" driven, with depth being high but sustainability possibly lower than in 2020

• 3. Different Directions of the Liquidity Curve

2020-2021: Surplus surged to 4-5 times, Hibor fell below 0.2%, stimulating comprehensive valuation expansion in REITs, real estate, and finance; Hong Kong stock trading volume increased, with the Hang Seng Index reaching the upper limit of 30,000 points in Q1 2021.

2025: After injection, the surplus is still less than half of the 2020 peak; if the US dollar rebounds and the interest rate spread widens again, the Hong Kong dollar may return to the weak side range → Hibor may rise again. The "looseness" of the funding environment is difficult to replicate the full bull market of 2020.

• 4. Chain Reaction: From Hong Kong Dollar to Hong Kong Stocks

Hang Seng Dividend ETF

2020: Hibor ≈ 0, the arbitrage chain is "low-cost buying HKD + 7-8% dividend," lasting for 18 months;

2025: Hibor has reached 2% and the liquidity of the Hong Kong dollar has not completely flooded; if the US dollar rebounds → the dividend-Hibor spread narrows, and the arbitrage window becomes shorter.

IPO and Southbound Trading

2020: Over-subscription of IPOs led to a cyclical demand for the Hong Kong dollar; 2025: The financing scale of Hong Kong stocks has not seen a "big year," and the main reason for southbound buying is the weak US dollar sentiment; once DXY rebounds, financing and inflows may quickly cool down.

Real Estate & Interest Rate Sensitive Sectors

2020: Extremely low interest rates → rebound in real estate valuations; 2025: The interest rate center remains high, real estate financing has not significantly improved, and the rebound strength is limited.

Outlook: Three "Gates" to Observe

Intensity: Daily intervention scale hits record, but the total water level has not yet reached the "flood peak" of 2020, thus limiting the downward pressure on interest rates and asset valuations.

Drivers: In 2020, a "persistent spring" was formed by QE + IPO + southbound trading; in 2025, it is mainly driven by reverse positioning of the US dollar, resembling a "pump"—the water comes fiercely, but it may also retreat quickly.

If the "import grabbing - US dollar depreciation" chain ends in Q3, with a narrowing deficit + the Federal Reserve truly cutting interest rates, the US dollar may rebound—at that time, the Hong Kong dollar may fall back to the weak side, Hibor may rise back to 3-4%, and the long bull market of 2020 is unlikely to reappear, with Hong Kong stocks entering a "liquidity vs. fundamentals tug-of-war." Investors should focus on the continuous expansion of Aggregate Balance and the speed of DXY rebound—these two factors will determine whether the strong push in 2025 is a fleeting moment or the beginning of a new wave of capital influx.

Hong Kong Dollar, Taiwan Dollar, and a Basket of Emerging Currencies After a Surge: The "Hong Kong Stock Equation"

Conclusion first: In the short term, Hong Kong stocks are a typical "liquidity > fundamentals" trade—strengthening of the Renminbi (RMB) brings southbound funds and valuation premiums, enough to mask the downward revision of profits in the export chain in the first quarter; however, entering 2H25, if RMB appreciation continues to compress the profits of export-oriented enterprises, while Hong Kong stock valuations have been inflated by southbound funds, the two curves will show a scissors difference, with significant sector differentiation and volatility intensifying

Currency Linkage Path: Weak Dollar → Strong Hong Kong Dollar → Southbound Capital

The weak dollar drives the Hong Kong dollar to "hit the strong side," with the Hong Kong dollar being pushed towards the strong end of 7.75 due to the linked exchange rate following the weakening of the US dollar. The Monetary Authority bought US$6 billion on May 2 to stabilize the appreciation, marking the largest intervention since 2004.

The renminbi also appreciates synchronously, with the offshore price returning to within 7.20. Funds are repricing the logic of "Hong Kong stocks = offshore renminbi assets," triggering continuous net buying from the southbound.

The "dual rise" effect of valuation and exchange rate leads funds to shift their positions to Hong Kong stocks, as the net asset value measured in RMB appears "stagnant" against the weaker backdrop of A-shares. Given that the Hang Seng Index is already undervalued (PB ≈ 0.9×), marginal buying is more sensitive to index movements—so far this year, the Hang Seng Index has risen ~20%, while the CSI 300 has only increased by 2.5%.

Fundamental Undercurrents: RMB Appreciation is a Negative Feedback for the Export Chain

Aside from tariffs, if the renminbi continues to appreciate, it will create dual pressure on exports. These profit corrections will be concentrated in the 2Q–3Q financial reports, becoming a risk source for the Hang Seng Index in the second half.

How do the "Liquidity vs. Fundamentals" Curves Move?

Sector Strategy: Who Benefits from Liquidity Dividends, and Who Bears Exchange Rate Pressure?

Benefiting Groups

• Domestic banks and insurance: RMB appreciation + improved Hong Kong dollar liquidity → stable net interest margin and foreign asset exchange rate gains.

• Local real estate & REITs: Hibor decline and strong Hong Kong dollar attract Chinese capital buying; leverage on the recovery of Hong Kong retail consumption.

• High-dividend utilities / telecommunications: RMB assets + stable cash flow become "quasi-bond holdings" for southbound capital.

• Technology giants benefiting from the AI cycle.

Pressured Groups

• Export manufacturing chain (textiles, footwear, OEM electronics): Double hit from exchange rate and price differentials, making it difficult to raise ASP.

• Shipping, ports, and container shipping: Dollar-denominated billing means RMB appreciation directly dilutes revenue; global cargo volumes are suppressed by tariff disputes.

• Raw material cyclical stocks: If the weak dollar pushes up commodity prices, costs will rise first, while finished product price increases lag behind.

Therefore, in the short term, Hong Kong stocks are still dominated by liquidity. As long as the combination of RMB appreciation + Hong Kong dollar liquidity remains intact, the Hang Seng Index has inertia for upward movement; the preferred β strategy is financials, real estate, and traditional high-yield sectors.

In the medium term, if the RMB continues to appreciate by 2-3%, the profit compression in the export chain will amplify through the earnings season, and fundamentals will be repriced; at that time, the differentiation between long and short positions will intensify, requiring hedging for export-weighted sectorsLong-term (Low Spread World): Whether Hong Kong stocks can maintain valuation reconstruction depends on whether southbound liquidity shifts to long-term allocation rather than trading purchases; at the same time, observe whether the valuation gap between A-shares and Hong Kong stocks returns to the pre-pandemic range of 10-15%.

Currently, Hong Kong stocks are indeed in a tug-of-war between liquidity and fundamentals, but the key sentinel in this game is not the index level, but the RMB exchange rate, the pulse of southbound funds, and the rhythm of export EPS downgrades. Pay attention to their subtle changes to take profits or hedge before liquidity recedes.

End of article.

The beauty of Bayesian, original title: "Hong Kong Dollar Two Rounds 'Strong Collision' Panorama Comparison: 2020 vs 2025"

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk