© Reuters.

(Bloomberg) — Demand for Hong Kong dollars is intensifying in the face of an increasingly politicized environment, with mainland buying helping to buoy both the pegged currency and local stock market.

The city’s de facto central bank sold a combined HK$15.8 billion ($2 billion) to purchase the greenback on Wednesday, the biggest intervention since it started defending the peg on the strong end of the trading band in late April. The Hong Kong Monetary Authority has now spent almost $12 billion this year to keep the currency from strengthening further.

Wednesday’s intervention came shortly after news that some Trump aides are considering plans to undermine the peg mechanism in retribution for Beijing’s crackdown on civil liberties in the former British colony. Mainland-based investors showed their support for the city through buying more than $1 billion worth of Hong Kong shares on the day.

The events show how the city’s financial system is increasingly being caught up in the rivalry between Washington and Beijing. For now, Hong Kong’s markets seem immune to the tensions. Red-hot Chinese equities, a stronger yuan and low valuations have helped push Hong Kong stocks into a bull market. Mainland purchases of local equities since Beijing first announced plans for Hong Kong’s controversial security law are now nearing $9 billion.

“Bullish sentiment is pushing short-term funds and liquidity into Hong Kong,” said Banny Lam, managing director at CEB International Capital Corp. “China’s stock market is very hot and you see a lot of people using the stock connect to buy these shares. All these factors are attracting liquidity.”

The Hong Kong dollar traded at 7.7501 per greenback at 10:40 a.m. local time Thursday, one pip from the strong end of its band. The little changed.

©2020 Bloomberg L.P.

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