So You Want To Bet On Hong Kong Dollar Appreciating?15 September, 2011, 3:20. Posted by Zarathustra
Tags: Economy, Hong Kong, Hong Kong dollar
So Bill Ackman next big bet is go long Hong Kong Dollar.
I can very much appreciate his rationale in making such call. After all, the linked-exchange rate system as it is known here has been making independent monetary policy largely impossible, with monetary condition largely influenced by various factors such as the Federal Reserve’s monetary policy, strength of the US dollar, and increasingly the monetary policy of the People’s Bank of China. Between 2009-2010, when major central banks are all in full force easing monetary policy quantitatively, the outcome for Hong Kong has been inflation and asset prices bubble, particularly real estate bubble. The situation has changed slightly as monetary tightening of the People’s Bank of China has effectively drained liquidity away through some rather obscure and indirect ways. But at the end of the day, the Hong Kong Monetary Authority has absolutely had no control over monetary policy.
So I can understand the rationale of betting on Hong Kong dollar being de-pegged/re-pegged at a different rate/peg with Chinese Yuan instead (and hopefully at a higher rate). In fact, I quite hate the peg, as I called it root of all evil.
But there is something wrong. Below is a relevant bit from a Legislative Council minutes, dated 13 January 2011. Member of the Council Chim Pui-Chung asked Chief Executive Donald Tsang about the linked-exchange rate system (he hates it, obviously), and the subsequent responses (emphasis mine).
MR CHIM PUI-CHUNG (in Cantonese): Chief Executive, my question is about the linked exchange rate. It is very difficult to answer.
We know that the Hong Kong and US dollar peg (the peg) has been in place since 1982, and undeniably, the peg has been serving as a stabilizing force in the economic and political life of Hong Kong over the past two to three decades, especially during the transition period. But we must also realize that it is already 12 years after the transition period.
Chief Executive, you must realize that the US dollar will indeed give you a very big headache, the headache arising from its depreciation. The depreciation of the US dollar will lead to galloping inflation, tormenting the people immensely and knocking you off-balance altogether. I am not blathering. I hope that the two government officials who were once the Financial Secretary can hear …… You were once the Financial Secretary too. I should say "three".
Therefore, Chief Executive, my question is: since Hong Kong is not endowed with any natural resources, should a special committee be established to explore whether this is the right time to unpeg the Hong Kong dollar from the US dollar? This is an issue of very great importance. You may think that there is no problem. But six months later, you will realize the gravity of the issue. What I have put forward is a beneficial and constructive piece of advice.
My question is: will you undertake in public to establish a special committee on studying this issue? This is very important. There is actually no big deal about conducting any studies. Why do you even refuse to conduct some mere studies? Why are the Secretaries of Departments and the head of the Hong Kong Monetary Authority all so downright negative, saying that this issue cannot even be touched? Why?
CHIEF EXECUTIVE (in Cantonese): Uncle CHIM, I think you should know the reason only too well. At present, we see that all over the world, an inflation crisis is present. Such a crisis is present not only in places where the local currency is pegged to the US dollar; the crisis is also present in places where the local currency is not pegged to the US dollar. We see that inflation has also appeared in the Mainland, and the whole of Asia is similarly facing such a situation. When there is an abundance of capital and if this is not matched by any double growth of the real economy, such a situation is bound to arise.
The linked exchange rate system in Hong Kong is time-tested and has been in place for 29 years. If one says that …… Throughout our journey of tiding over the various vicissitudes, this system has stood by our side. When our economy is in good shape, we depend on it. In times of economic sluggishness, we always manage to eke out a living. I think we will somehow manage to work out solutions to this very problem. Uncle CHIM, as you could also hear just now, a good part of my opening remarks was devoted to the inflation problem. On this issue, all my government colleagues have whole-heartedly sought to understand the situation, trying every possible means to lessen the impacts of inflation on grass-roots people.
I strongly believe that on this issue, if ever we say that we want to conduct a study, there will be serious consequences. Speculators will come to our doorstep right away. You should understand what I mean. If you were a speculator, you would certainly do so. Therefore, when we know clearly that the financial markets, including the stocks, bonds and exchange rate markets, will surely see great fluctuations during this period of time, should we still add this uncertainty to the picture? The danger is very great. We can discuss with you in detail later, but the establishment of a committee to discuss this matter is simply not worthwhile and may involve great risks. Besides, I think that in the present-day world, Hong Kong depends on trade for its survival, so the stability of our exchange rate is very, very important. Uncle CHIM, I have never seen any other financial system similar to our economy, the trade figure of which is as large as three times its GDP. This means that any slight changes that may affect our trade prospects will lead to serious consequences. Trade must depend on a stable exchange rate, and if anything goes wrong with our exchange rate, it will be pointless to talk about anything else. Therefore, we understand that given Hong Kong’s rapid economic recovery these days, people will naturally come under the pressure of inflation and turn more sensitive. However, we will join hands to tackle …… As long as we can …… We still have an excellent, sound and sophisticated financial system. If we have any surpluses, we will be able to meet sudden needs. I believe we are able to overcome any short-term fluctuations. I believe we are able to overcome such fluctuations.
However, speaking of delinking from the US dollar so suddenly, I must say that we are simply not well-equipped for this. Nowadays, currency peg is the global trend. This is the case in Europe, and in the case of Latin America, the currencies of South and North American countries are also linked with the US dollar under NAFTA. In Asia, there is total disunity in this regard. Hong Kong itself is a tiny economy, and if we allow the free convertibility of our currency ― one must not think that since some places adopt the approach of exchange rate manipulation, we may also do so ― if we allow free operation in this regard and permit the free convertibility of our currency, the consequences will be very, very serious. You also know how large our "fish pond" is. It is very easy to spoil it by speculation. For this reason, we must handle the situation very cautiously.
Therefore, speaking of how such problems should be handled, my personal and humble opinion after all our experiences over the years and the two financial turmoils is that currently, Hong Kong is simply not well-equipped for this, and it should not consider any delinking either. When should such an idea be really considered? It is only when Renminbi (RMB) …… It is only when our biggest trade partner allows the full and free convertibility of RMB in its capital account that we can become genuinely well-equipped to consider whether our currency should be pegged to RMB; we must not suddenly delink from the US dollar without any good reasons and hurl ourselves out into the open seas at this stage. I think this is something very dangerous. However, I am still very grateful to you for raising this question, so that I can have an opportunity to express my personal views.
So first of all, the government thinks that inflation is a problem not because of the peg, as inflation is present in countries where their currencies aren’t peg with anything. Second, they see the peg as an important stabilising force. Third, the government thinks that only when the Chinese Yuan is fully convertible will it be appropriate to consider pegging with Chinese Yuan. Fourth, they think that talking about thinking about de-pegging by itself can be serious.
Finally, a bit of idiocy: currency peg is the global trend? He must be very confident that there is no crisis in Europe.
If you want to bet on Hong Kong dollar appreciating, the chance is that first of all, you will not lose money even if you leverage up by 100 times, because USDHKD pair does not move much. Second, the probability of your bet realising might be very very low, but the reward will be great if you are levered up. On the whole, it will probably not be a wrong trade, but it will certainly be a very boring trade.