For the past month or more, overnight interest rates in Hong Kong have been stuck just above zero per cent. Since everyone got used to ultra-low interest rates during the last couple of decades, it may not be immediately obvious how bizarre, unexpected and potentially alarming that situation is — or how it illustrates everything from the dwindling appetite of Asian investors for US assets, to a modest revival of Hong Kong’s capital markets, to surprising limits on the risk-taking capacity of banks and hedge funds.
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The reason zero interest rates in Hong Kong are so odd is because its currency is pegged to the US dollar. That offers what seems like an easy arbitrage: borrow in Hong Kong at zero per cent, convert to dollars and earn US interest rates of more than 4 per cent. For an arbitrage, that is a large return, and since the currency is pegged the risk should be minimal. Yet for more than a month this divergence has continued. Every evening at seven o’clock the Hong Kong Monetary Authority announces the overnight rate. On Friday it stood, again, at 0.01 per cent.