The Hong Kong US dollar peg appears to be under pressure.
The Zero Hedge writes (bold and italics original): "Yesterday saw something quite unusual in the New York trading session. The Hong Kong Monetary Authority bought $715 million (selling HKD) in the FX markets to manage its currency peg, injecting the money into the banking system (and expanding its balance sheet) to prevent HKD from rising above its permitted range. HKMA projects its balance sheet to grow to the end of July, but as Simon Black (of Sovereign Man blog) notes, this could well be the start of a bigger shift - an end to the US Dollar peg..."The US is no longer the undisputed superpower it once was. The US dollar is dragging them down. Hong Kong is easily strong enough to stand on its own." HKMA's balance sheet is surging - HKD demand pressuring peg, thus buying USD (and selling HKD) to manage peg..."
Sovereign Man's Simon Black also suggest that this could represent a speculative attack on the peg: "The reasons are unclear, though it’s entirely possible that investors are attacking the peg, similar to what happened to the pound back in the 1990s. We could be in the early stages of such an assault." (Mr. Black’s article is a recommended read)
The HKD-USD peg basically means that Hong Kong's has been importing the US Federal Reserve's monetary policies.
As I wrote back in 2009: Since the Hong Kong currency has been pegged to the US dollar it implies that Hong Kong has essentially been importing its monetary policy. Yet, the inflationary path undertaken by the US government suggest that Hong Kong is equally importing inflation-hence the rapid monetary expansion that has been fueling booming property and stocks.
And fuelling asset bubbles has indeed been the case.
Hong Kong’s Hang Seng Index approaches the 2010 highs but has been still about 20% off from the 2008 highs. Hong Kong’s valuation has been about 39 times historic earnings according to this Bloomberg report!
And cognizant of risks of property bubbles, Hong Kong authorities imposed additional property curbs in 2013. A 15% flipping tax was first reportedly introduced in November 2010 as with doubling of stamp duties. Eventually the Hong Kong government introduced a 15% tax on foreign purchase according to a report from Bloomberg
Recently such restrictions appears to have been eased, perhaps in conjunction with the recent loosening of China’s monetary policies.
[As a side note: the Chinese central bank the PBOC have launched a 1 trillion yuan ($171 billion) stimulus (or QE?) via the “Pledged Supplementary Lending" (PSL) which has spurred the recent surge in China’s stocks. This fills in the gap—”this implies a Xi-Zhou PUT (from China’s President Xi Jin Ping and PBoC governor Zhou Xiaochuan) in motion”—of my Sunday’s commentary]
The ramifications of the present easing has been a dramatic resurgence in Hong Kong New Residential loans and to accelerated record loans to the private sector.
As I also noted in the past, Fed inflated bubbles has impelled and fostered recent outcries against growing inequality that has led many Hong Kong residents to embrace populist anti-market politics and which has partly ushered in a welfare state: "The point is that not only has the easy money policies of the US Federal Reserve been blowing Hong Kong’s bubble cycles, at worst such policies have been gnawing at Hong Kong’s relative free market environment by whetting or stoking on populist anti-market sentiment and the promotion of the mixed economy-welfare state. In short, bubble policies function like a political Trojan horse for destabilization"
And this is why the HKD-USD pegged is numbered.
Again from my 2012 article: Hong Kong authorities should deal with the US dollar peg rather than intervene in the marketplace. Perhaps they should consider the proposal, which I earlier noted here, by Prof Joseph Yam, the former head of the Hong Kong Monetary Authority (HKMA), who is also one of the architects of Hong Kong-US dollar peg through a monetary board, to alter Hong Kong’s monetary system by shifting from US dollar peg towards China’s yuan or through a basket of other currencies. They could also consider Yuanization or using mainland currency by scrapping the Hong Kong dollar altogether.
The recent pressure on the HKD-USD peg suggest that markets, rather than HK authorities, will determine when this untenable relationship ends.
Will the current currency speculation break the peg? Or will a bursting bubble do the job?
No comments:
Post a Comment