Posted by
OffThePeak
12 yrs ago
Hong Kong Property & the Peg
Grin and Bear it, is the message of Tom Holland in today's SCMP
Yes, the HK$ peg is to blame, but the alternatives are worse
"Cheap money is behind high prices but any moves to fully flat or manage the currency like Singapore do have their pitfalls"
+ Readers of TH's column have argued that attempts to increase supply would do little to bring down prices, because rates are too low. "At 2-3 percent interest rates, building more flats will simply encourage more buyers to invest in the property market."
+ HK replicates low rates from the Fed in the US, thanks to the peg. If it tried to raise rates they too much money would flood into the HK$, ruining the peg
+ The problem with getting rid of the peg is: What do you replace it with?
+ RMB, the Chinese currency is not fully convertible, and HK would have problems if it tried to replicate the higher rates in China. Again, money would flood into the HK$. And there would not be the mechanisms to push it back down, since the Yuan is not liquid
+ Managing its won currency thru a basket, like Singapore, has problems of its own. Singapore does not deviate very far from US rates, and so its property market has shot up along with HK property prices
+ Hong Kong would not welcome the currency volatility that would result from the alternatives
====
TH's email is: tom.holland at SCMP dotcom
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I have sent emails to Tom twice before:
1/
I wrote to him about the merits of Gold, which he had rubbished in a column. At the time, gold was less than half the current price. I think he simply ignored it
2/
I wrote to him about rumors I had been hearing about how the HK$ might be de-pegged, and maybe re-pegged. (That hasn't happened yet.) One possibility that I mentioned was that the peg could be half US$ and half RMB. In fact, I heard this idea from John Greenwood, who is credited with "inventing" the peg. His logic was that a 50/50 peg would be more managable because the currency could be mamaged using the liquid US$ half. But that might still leave rates in HK too low.
Perhaps there was not enough room in the column today to mention this interesting alternative. Or maybe he has forgotten about the idea.
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The HKD doesn't have enough capital to float but I definitely think a basket of currencies would serve to stabilize it. (ie. a mix of swissy/sing/CNY/etc) I think we have to be careful on the ratios and selected currencies, but it
This would help defend against attacks on the HKD a la Soros previously.. and would diversify the monetary policy that we'd inherit.
I've said it time and time again, the US is in a completely different place than we are economically. To blindly follow them makes no sense at all.. It's akin to a completely healthy person taking antibiotics because their relative is sick.
re: your peg guy.. It's from Gulliver, the HSBC Asia guy.. (link: http://online.wsj.com/article/SB10001424053111903520204576483981106651972.html)
"If Hong Kong was to review the Hong Kong dollar peg…[it] would be better to be revised to some kind of managed float with a basket of currencies that reflect the trading partners of Hong Kong, rather than choosing either a complete free float or to peg it to another currency,"
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Ed
12 yrs ago
OTP - feel free to email my comments that completely destroy and expose Tom as a minion of the property cartel... I would be interested to see his response.
Agree - US policy is absolutely NOT what HK needs... it is insanity for HK to follow US policy with regard to ZIRP... it is throwing gasoline on a fire... the US economy is on life support - HK is not...
It doesn't matter what the HK gov't does to try to deflate the crazy high HK property prices... so long as we are on the peg - and the US maintains ZIRP - HK will remain out of control...
Haven't thought the implications through... but recall that a number of Asian countries were pegged to the US prior to their collapse in Asian Financial Crisis...
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Remmy
12 yrs ago
Toms article (or at least the reasoning on it) was entirely correct.
His explanation of the effect of the peg is also correct. Remember the peg caused us a great deal of pain between 2000 to 2007 while other economies were thirving. Now is time for us, who beared with the peg, to benefit from it.
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I think the weakness in the HKD, relative to RMB, is putting upwards pressure on HK property prices.
I got a call from an Estate Agent on monday: "I have a buyer for your flat" (sight unseen.)
The buyer was from Mainland China, but his price idea was too low
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Sovereign Man (aka Simon Black) urging people to consider buying the HK$
http://www.sovereignman.com/expat/practical-advice-make-an-easy-25-on-the-dollars-decline-9386/
Quote
Practical advice: Make an easy 25% on the dollar’s decline
. . .
Such monetary policy has been instrumental in driving Hong Kong’s property prices to the moon. It’s absurd– a small hovel in Hong Kong’s central district will easily set you back more than a million dollars.
It doesn’t take a genius to figure out that when banks are handing out mortgages at nearly 0% interest, property prices are going to spike.
As an example, if you can afford a $2,000 monthly payment, that will buy you a $370,000 home when amortized over a 30-year mortgage fixed at 5%. But if the loan terms are changed to ‘interest only’ at just 1%, suddenly that same $2,000 monthly payment affords you a whopping $2.4 million home.
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Random thought: if the peg goes or the HKD is revalued upwards, then the value of all assets which are not denominated in HKD (and many which are) goes down - is anyone actually selling their gold etc to buy HKD?
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I'm not going to sell gold for the HKD, but I am holding a lot of HKD right now.. just sitting there in the bank burning a hole in my pocket.. :P These time deposits are useless!
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OTP. Sovereign man seems to be ignorant of the fact that large deposits are needed to buy flats in HK when he said financing was easy to get. I think there is a good chance the HK$ will be revalued. Firstly the government could porray it as a vote of confidence. Secondly, those with safe jobs would benefit (ie civil servants).
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@ Loyd - Spot on - the massively overpaid and underperforming civil service would be one of the biggest beneficiaries of any revaluation of the HKD. At a personal level, I would really really hope that if we do see a revaluation, it will be after I retire in the middle of next year - I am due a meaningful payout when I leave but it is in USD.
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END THE PEG, says Simon Black, the "Sovereign Man":
"All of the hundreds of billions of new Hong Kong dollars floating around in the system has to end up somewhere, and in recent years, much of it has ended up in Hong Kong’s property market.
Property prices in Hong Kong are the most expensive in the world. Recently a 6,200 square foot apartment sold for $62 million (USD), a mind boggling $10,000 per square foot.
Yes, Hong Kong is a nice place to be, and with such fixed supply and high demand, property prices are sure to rise. But fueling these fundamentals is the ever-increasing supply of hot money desperately seeking a home. Or a parking spot, as it were.
All of this is unsustainable. The only REAL long-term solution is for the government to stop artificially pegging its exchange rate to the US Dollar… and thus cease importing the ridiculous monetary folly the Fed has embarked on in the USA."
===
+more: http://www.sovereignman.com/finance/no-inflation-here-parking-spot-in-suburban-hong-kong-sells-for-168000-10063/
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What my question is, you know when the FED prints money and they sort of disperse/cascade (very poorly) through the use of t-bills and bank loans.. How has HK been offloading its printing? Are they just flooding the currency market with it selling HKD and buying up USD? Has it reached HK people's hands more directly via low interest bank loans transfered to low interest loans to HKers?
I'd assume not seeing how hard it is to get a mortgage these days (allegedly, I have no first hand experience.) I have however, been contacted 10+ times for a business loan to my business for no reason at all.. Offers of up to a few mil HKD at an annual interest rate of 0.24% from HSBC. (crazy?)
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Yeah.
With all that liquidity in the system, and a slow property market,
you may be seeing Banks cut spreads on their Mortgage loans soon
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@ Elsdon - is the HK government actually doing any printing (apart from $10 notes and coins)? I thought they were selling existing HKD reserves and buying non-HKD assets?
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"selling existing HKD reserves and buying non-HKD assets"
That action puts more HKD into the system - flooding banks with HKD liquidity
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@ OffThePeak - is that actually correct?
If the HKMA takes some asset from its reserves, that asset will either be (i) cash/deposits or (ii) securities. If it is cash/deposits, they sell to by FX, then there is more liquidity added to the market as the HKMA's cash/deposits which were not previously in circulation are not in the hands of other market participants who MAY deploy them more actively.
However, if the HKMA is selling securities which it holds in order to have the HKD to sell for FX, the act of liquidating the securities actually takes liquidity out of the system and the resulting swapping of the HKD obtained for FX makes it more or less a wash as far as liquidity is concerned.
In either case, no new HKD is created.
Net result is that I expect that some liquidity is added to the system but not as much as the headline numbers would suggest.
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They take USD liquidity out, and put HKD liquidity in.
In that way, they hold down the HKD exchange rate
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@ OffThePeak - I understand that but since the HKMA is not printing new money, it has to take that HKD from its reserves. If it first sells bond, shares etc in order to have HKD then it is taking HKD out of the system before it puts it back in by selling HKD to buy USD (or other FX). What I don't know is how much of the HKD comes from simply utilising cash/deposits already held and how much (if any) is sourced by first selling investments.
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I don't understand how it works but if more US dollars are being created and the HK$ is fixed at 7.75 to the US$ then I suppose they can print 7.75 HK$ if they receive US$1. Similarly if someone gives them HK$7.75 the HKMA will give them US$1 and take the HK$7.75 out of circulation. I think it works in much the same way as a school fete with coupons (ie HK$) that can only be spent at the fete. Or maybe casino chips would be a better comparison.
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Loyd, is that what they're doing?
How are they 'selling' their HKD to get money to buy USD though? They're not selling any products or bonds or anything, are they? Are they just eating into their reserves?
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TI,
You are talking about a "sterilised" intervention.
The magnitude of the intervention has been so big, I would be surprised if the whole thing was handled that way.
Many countries with currencies linked to the USD have complained that the Fed's loose money policy has forced them to boost the money in circulation. In effect, through the method that I have described, the Fed has "exported inflation."
Check these terms on Google, and I think you will find I have described them accurately, albeit in simple language.
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@ OffThePeak - I'm not disagreeing with you but I have to wonder whether the HKMA is overstating the amount of liquidity it is injecting into the HK market. It will be aware of the effect of excess liquidity on property prices, inflation etc so they have to balance the need to defend the peg against the need to mitigate against the consequences of excessive liquidity. Hence they state the biggest number they can but quietly forget to mention that some of the money put in was first obtained by taking money out of the system.
I have no proof they they have done this - I'm just enough of a skeptic to ask the question.
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THE HKD PEG DEBATE continues... (from the Main thread):
Posted by Loyd Grossman is Miss Venezuela (1 hr ago):
Gdep. Re money going out of HK. This is mainly HK money so I wouldn't worry about it flowing out. However, this HK money is being rapidly devalued by the Fed and if goes on until 2015, your HKD savings are going to be cleaned out. Apart from those who are really poor and need public rental units, all this fuss is mainly about HK people who had saved up and not bought because they thought prices would fall. It's not about hot money and it's not about mainlanders. It's about having missed the boat.
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Posted by OffThePeak (9 secs ago):
"this HK money is being rapidly devalued by the Fed"
You can make this argument about the USD, but not the HKD.
If the peg is changed or removed, the dollar link will not be there, and HK will not be so closely tied to the USD's future problems.
It is VERY LIKELY that the peg will go at some point. If it happened tomorrow, then rates would likely rise in HK, and with that: Property would fall
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Message for LGMV:
======
You may feel that I am picking on you - that is not the case.
I respect your opinion, and have many times on many threads, pointed that out, and where you have been right.
But having said that: I find rich areas of debate on topics like Mid-Levels, and the impact of inflation on Property prices.
Good luck to you, even when we disagree !
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(for the record here):
TODAY is the 30th Anniversary of the HKD's peg to the US Dollar
====
The SCMP mentioned that some Hedge Funds are speculating that the peg may go at some stage.
"One well-known speculator in recent years was hedge fund manager William Ackman, founder of US-based Pershing Square Capital Management.
Ackman said in September last year he would keep a wager that would profit if Hong Kong allows its currency to appreciate.
The easiest way for the authorities to allow the currency to appreciate would be to change the peg to HK$6 per US doilar, a 30 per cent gain, he was quoted in various media."
> SCMP, B2
===
That sort of jump in the HKD, might trigger a 20-30% drop in HK Property prices
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The Peg's Success... during the last 30 years
=======
+ Hong Kong's GDP increased by nearly 10x
+ HK"s credit rating was upgraded to AAA in 2010
"The linked exchange system is a simple, clear, highly-transparent and rule based system"
- John Tsang, Hong Kong's Financial Secretary
BEFORE the Peg
=======
+ Waves of capital flight caused a collapse from 5.50 to 8.60
+ Inflation rose to over 15 per cent
+ The HK Dollar lacked a stable anchor, and there were fears over HK's future
+ There was no way of managing the currency, with no Central bank
"Undoubtedly, Hong Kong's peg to the US Dollar has helped it to become the premier international capital market in Asia."
"The US dollar is still the preeminent currency for denominating trade and capital transactions throughout Asia..."
"Interest rates of the euro, the British pound or Japanese yen are as low as US rates."
"The problem with the renminbi is that it is not conevrtible... likely to be many years before China adopts convertibility."
"The Basic Law specifies that the Hong Kong dollar will be the currency of Hong Kong until 2047."
- John Greenwood, economist and "father of the peg"
What's needed?, per JG:
+ Full and irreversible convertibility of the Rmb - for trade and capital accounts
+ Rmb must have international reserve currency status
+ Financial markets must be developed in China to a point were interest rates are the primary tool of monetary policy
Then, the HKD could integrate well with China.
Also: HK would need to be confident that China was the main driver of HK's economic cycle.
Currently, it is still the US.
> SCMP, A17
Chart: Gold Price in HK Dollars:
http://goldprice.org/charts/history/gold_20_year_o_hkd.png
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Off the Peak - yes I agree that the Peg will stay but if people THINK there is a possibility that it might be rebased to 6 or 6.5 (say to align broadly with China) at some point over next few years, that will actually support the market here as the overseas investors (Chinese especially) who have been excluded due to Stamp Dut Measures might believe that currency gains would offset the Stamp Duty.
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Cut the BSD in half. and the Mainland Buyers may return in force.
That will be a first line of defense, if prices start falling too fast IMHO
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HK Dollars days are numbered - says SCMP editorial
This week a plan was announced :
"Allowing direct, two-way trading between Hong Kong and Shanghai."
This plan, when implemented, would :
"lift capital controls on up to 500 billion yuan (US$ 89 billion) of stock transactions,
mainlanders will be allowed to trade stocks on the Hong Kong exchange through
mainland brokers and the Shanghai exchange."
"It is a major step towards integration of the HK and mainland capital markets."
"The move will consolidate Hong Kong's status as an international market, while
raising the capacity of the mainland stock markets."
+ Short-run: there will be a focus on arbitrage between H-shares and mainland's A-shares
+ Increased trading volume on the HK exchange is likely
+ Long-term: Shows HK is important to China's monetary reform
+ Sooner or later, the reforms will extend to the trading of other currencies
"Sooner or later, reforms will test the relevance of the Hong Kong Dollar."
"If trade and financial commitments can be settled in yuan (in HK), it becomes a more
convenient currency to use."
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