HK Dollar Peg Will Be Dropped Soon

Posted by Sad Sack (27 days ago)

If the USD continues its drop and the US maintains low interest rates to attempt economic stimulus HK must depeg its currency.

Otherwise inflation goes through the roof as the cost of all imports (well the cost of almost everything because almost everything we consume is imported) increases in cost.

Look at housing, HK is NOT the USA with its mortgage crisis. So the effect of low interest rates (US lowers, HK must follow) creates a different sort of bubble, a buying bubble as cashed up people keep buying property driven by low interest rates taking property to all time highs. Surely this cannot continue.

At some point the benefits of a peg to the USD are outweighed by inflationary pressures.

It will go. There will be no discussion of it in advance of course, nor will it likely go at a time when its expected to go.

We will wake up one morning soon to find its gone.

That's my gut feeling, what do you think?

Posted by Sara Silvester (27 days ago)

That sounds scarry. What will happen if it is really depeg? Most of my family income now is in HKD? Any suggestion?

Posted by Sad Sack (27 days ago)

I am not an economist but I think this would be a good thing.

1. Depegging would almost certainly mean an increase in the value of a HKD against other currencies so you'd be wise to keep your HKD (I think the govt would peg against a basket of other currencies rather than free float the HKD)
2. This would reduce inflation dramatically as it would be cheaper to import.
3. Property market would likely slide because HK would not longer have to follow the US on interest rates. To maintain the strength of the HKD and keep inflation in check they would increase interest rates which would encourage inflows in HKD. Higher interest rates make mortgages more expensive thereby taming the property market.

I dont think we have to fear a depegging, the peg is with the USD because it was stable and strong for years. That is no longer the case and why should we stick with a dog?

Peg to a more stable currency or basket of currencies and we'd be better off without a doubt.

The turmoil in the US is far from done, and from what I am reading the USD will crash dramatically due to the massive foreign debt, burden of war etc... Watch the USD because that is what will trigger the depegging.

Other countries have already depegged due to inflationary pressures caused by their peg to the USD. Cost of everything in the shops is soaring and HK will not hang on forever.

Posted by Digital Blonde (27 days ago)

I am an economist, and I can tell you in my humble opinion, that depegging is not going to happen any time soon.

Posted by Sad Sack (27 days ago)

When it does happen anyone with a job related to finance will be the last to know to prevent speculation. They will never do it when it is expected we will wake up one morning and it will be done.

I'd be interested to know from Digital or anyone else why they feel it will not happen. If the USD drops lets say another 20% against major currencies wouldnt inflation go through the roof in Hong Kong? Wouldnt something have to give? Wouldnt that be the peg?

That is was has caused others to depeg, so why wouldnt HK?

Posted by Digital Blonde (27 days ago)

Actually a surprising amount of economies (primarily in the mid east) have chosen to keep their peg to the US for the moment. The only real notable exceptions are Kuwait and China, this despite inflation running plus 10% in those economies. The new common currency for the GCC looks like it too will peg to the US dollar, though there is still some debate because of course the dollar keeps dropping. The primary reason for keeping the peg is political rather than economic, The Monetary authority seem to be committed to it and even major currency speculators like George Soros seem to take the same view and he bet heavily against the peg in 98 and got burned.

http://www.bloomberg.com/apps/news?pid=20601080&sid=aM2JR0X3jaqM&refer=asia
HKMA Commitment

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=awGzqjDP2EC4
Soros View

It is possible that the peg to the US dollar will be dropped but I reiterate my view that it will not happen any time soon, and even when it does, it will be re pegged to a basket of currencies as other small and even sometimes large economies have done.

Posted by onemorething (23 days ago)

Unless the people take on the streets to protest food prices, there will be no repeg anytime soon, IMHO. You are right that when it happens it will all be done without any prior warning or notification.

I believe the dollar peg is damaging to the stability of the economy of HK.

Posted by Sad Sack (23 days ago)

5.3% inflation last month, thats based on costs of consumer goods without including property.

I dont think people will have to take to the streets, if the USD drops 20% further, there will be no choice because everything is imported in HK and every weakening of the USD/HKD results in a similar bump in the cost of living.

Wonder how long they will continue to allow this pummeling of the consumer?

Posted by Digital Blonde (23 days ago)

For a very long time my friend, they withstood currency speculators in 1998 and pumped over 100 Billion US dollars into the equity market on a single day just to prevent devaluation back then, I think the government has the wherewithal to continue its pegged exchange rate for quite a while and its not like our policy makers are democratically elected either, so they wont be worrying about re-election.

Posted by Sad Sack (23 days ago)

I was around for that but that was irrelevant to this discussion. Tsang pumped cash into the market to try to prevent a market collapse, this is a very different situation.

If the dollar dumps a lot more the entire fundamentals of the peg come into question. The USD peg provides stability and strength and if it not longer provides this (and other currencies do) then I am quite certain they will dump it.

What is the upside of keeping the USD peg if the USD drops another 20%? Why stay with a dog? Surely they will start to look at moving on if this happens.

Posted by leghk (23 days ago)

Interesting discussion. Is the devaluation of the dollar really inevitable? and if so, will this have a negative effect on Hong Kong and other Asian economies as exports to the US fall sharply, on top of the problems caused by the peg to the dollar???

Posted by Mr Cynical (23 days ago)

If the HK dollar is off the peg I dont think this would affect exports, because HK exports almost nothing (they re-export under a quotas scam whereby connected families hold quota for HK and Chinese exporters buy it and avoid duty by claiming made in HK). Obviously if the Yuan is allowed to appreciate this will affect exports.

I think the larger impact of dropping the peg would be on the property market. If the government has more control of its currency interest will immediately rise to combat inflation. And that will end any speculative activity in property as money is no longer cheap

Posted by Digital Blonde (23 days ago)

1998 is not irrelevant at all to the discussion, you were asking what would make the govt abandon the peg and back in 98 EVERY hedge fund/long only fund and his dog was both selling the HK Dollar and simultaneously selling the Hang Seng Index creating enormous pressure for HK to abandon the peg, which is what market participant were betting on. If the HK govt was prepared to withstand the pressure of global financial market participants in order to maintain the peg (substantial pressure), which might I add kept Hong Kong in sustained economic malaise by forcing HK to follow the US interest rate cycle whilst HK was recessing and the US was in the midst of a boom, then I don't really see the govt having to much problem maintaining the peg even with a 40% further drop in the US dollar against Sterling/Euro. They are under far less pressure to do so, and given policy makers here are not up for re election, public sentiment hardly constitutes pressure for them.

Posted by Mr Cynical (23 days ago)

Quick point that has been made on numerous occasions by jake van der kamp in his column, the hk government did attempt to fend off speculators but it was only delaying the inevitable if these funds would have continued their onslaught, it was only the end of the financial crisis (not Donald Tsang's decision) that saved the HKD at that time. Once these funds smell blood they have far too much money to throw around for even the most flush administration would ultimately be swamped.

Posted by Digital Blonde (23 days ago)

Agreed, the HK govt can hardly defend against against a concerted sustained global effort, but I disagree with the reason for the end of that particular speculative attack. 98 was still closer to the beginning of the financial crisis than the end in my opinion (having started in 97 and lasting at least three years).

If a speculator builds up a short position (or long position for that matter) in a particular asset as was the case with the HK dollar back in 98, then they would of course expect to make a return from having taken that position. What happened in the month of August or October 98 (i cant remember which) was that the HK Govt announced over the weekend if memory serves, that it was going to take measures to support the Hang Seng Index and by proxy the dollar. In effect telling every major speculator and fund manager in the world that it was going to take a long position in HK dollar and equity in advance of it doing so. Come Monday, every man and his dog took the opposite short position and both the currency and equity market was under attack for about three days straight, it was total bedlam.

If you ask me what ended it, I think it was lack of resolve on the part of the speculators at having to cover huge short positions unprofitably in the short run. The HK govt had spent some HK$160 Billion by the end of day 3 and still had some HK$700 billion of reserves to run through, and speculators lacked the will to fight. They basically didn't think the HK Govt had the wherewithal to defend the peg at all cost, which in fact it did.

If they had continued their actions for a longer period of time, inevitably the govt would have broken and a devaluation been forced.

Posted by ppatio (23 days ago)

The peg will only be dropped if consumers are hurting too much.
Right now, they are not.
The dollar may be very low, oil may be very high, but in 4 months time all of that may have changed.

Posted by transhk (22 days ago)

Sad Sack - the HK Monetary Authority is not reactionary. They are not going to depeg, due to people dumping the US$ over a few years. As with all things we will see a balance over time. Chill.

Posted by camo2005 (21 days ago)

Does the HKMA really have a say in this ? I think Beijing decides this in reality (not officially though).

If they depeg will there be a peg to the yuan or a basket? Or a basket that practically follows the yuan one?

Posted by Digital Blonde (21 days ago)

I think its the HKMA, they will of course consult with Beijing, but when it comes to Hong Kong's finances Beijing has been remarkably good about not interfering.

Posted by alas9495 (16 days ago)

Removing the peg to the dollar would have a positive effect on the HKD and would appreciate in the same way the RMB has appreciated in China. It would have a positive effect on prices as most items are imported into HK so with a stronger currency the cost of imports would decrease. Housing prices would be negatively affected (and sadly this always seems to be the most important issue in HK) as interest rates would rise to cool off an increasing economy. Another factor that would lead to lower housing prices is a stronger HKD makes it more expensive for foreign investors to purchase as their currencies are worth less against a rising HKD. The HKD would rise because higher interest rates add to astrengthen currency scenario. Investors prefer a currency with a good yield and the higher the interest rate differential between the USD (low rates) and HKD would entice investors to hold a higher yielding currency. Selling USD and buy HKD drives up the HKD price like any basic supply and demand scenario.

Over time it is possible to remove the peg (think China, Malaysia) but probably won't happen overnight. The most appropriate immediate measure is to widen the band allowing some market influence on the value. Over time as HK becomes more integrated with China the peg should be dropped but although the USD is down it's not out. It would be poor fiscal management to take a knee jerk reaction and change monetary policy based on the last year and current negative dollar sentiment. Part of the reason for HK economic and monetary stability is because of the peg. Chooe any Asian currency as an example that has not been hit hard market forces in the last 10 years or so. HK weathered these problems because of the peg and because of the HKMA's financial strength to fight off speculators.

Posted by Blueberry78 (15 days ago)

What about an obvious practical solution? RMB becomes a convertible currency and HKD disappears and is simply replaced by the RMB overnight?

In the current situation, HK people won't be scared, they are already trying to covert as much HKD in RMB as possible.

What do you think?

Posted by Digital Blonde (15 days ago)

I think that would be a disaster.

Posted by axptguy38 (15 days ago)

"What about an obvious practical solution? RMB becomes a convertible currency and HKD disappears and is simply replaced by the RMB overnight?

In the current situation, HK people won't be scared, they are already trying to covert as much HKD in RMB as possible.

What do you think?"

I think people would be scared s**tless. Currencies only hold up as long as people believe in them. They are, in fact, a collective illusion. Doing that sort of thing would, as Digital Blonde says, be a disaster.

Posted by walkup2 (8 days ago)

Actually the peg is good for exporting to mainland China as prices become more competitive. Also with the peg in place, HKD does not appear in a currency speculation firing line. All in all it has been a stable force over the last 10 years.

Posted by dadda (8 days ago)

The RMB 1 year forward contract fell 1.4% yesterday. It is now possible that the mainland will look to devalue their currency, possibly in a 1 off move. This is why the China equities (and hence HK) fell yesterday.

I am very thankful that the HK MA is a well respected and well managed unit. The US$ peg is the best thing for HK in the long run.

Posted by sxc (8 days ago)

Of course, many expats would like the peg removed. Our HKD salaries will be worth more in our home countries.

However, for locals (> 95% of the population?), they like the peg due to its affect on property prices. Yes they will have more expensive rice, but that is outweighed by their gains in their property prices.

I recall reading an article in the SCMP a month or so ago about why the peg is great for HK locals. I can't remember all the arguments, but it made a very good point that popular consensus in HK is for keeping the peg.

Posted by axptguy38 (8 days ago)

"Of course, many expats would like the peg removed. Our HKD salaries will be worth more in our home countries."

Not those of us with income in USD! ;)

Posted by Virgil Tibbs (7 days ago)

Very interesting discussion! I often wish we had a stronger currency when travelling.

Can anyone shed more light on the import/export scam that Mr Cynical alludes to above?

I've read about this a few times but it never made complete sense.

Thanks

Posted by IslandHopper (7 days ago)

"Can anyone shed more light on the import/export scam that Mr Cynical alludes to above"

It's not an import/export scam and it's more about the past than today.

Basically the major area where this re-export was used was garments and textiles. US and Europe used to have import quotas and to these items made in China, but not made in HK.

So made in China garments turned to made in HK garments after crossing the border.