Thursday, October 25, 2012

What if the USD:HKD currency peg broke?

The Hong Kong Monetary Authority has intervened at least four times since 19th October to defend Hong Kong's 29 year old peg to the United States dollar. In total it has sold approximately HKD14.4 billion (USD1.8 billion) in an effort to keep the HKD at the upper end of its official pegged exchange rate to the USD (USD1.00 = HKD7.75).  The HKMA has publicly stated that it has seen no signs of any speculative attack on the peg (even though at least one high profile fund manager has come out and said he is betting on the peg going).

In the context of Hong Kong's total reserves (about USD296 billion in foreign currency reserves plus  other fiscal reserves held by the HKSAR government for various purposes), USD1.8 billion is not a lot of money. It's also worth remembering that Hong Kong is part of China and Beijing has been consistently supportive of Hong Kong from an economic perspective at least. If there were a speculative attack on the peg, Hong Kong is well placed to defend it (just as it did during the Asian financial crisis).

If the peg goes or is reset at a higher level, I would expect it to be by choice rather than because speculators force the HKMA's hand.

What would happen if the peg was removed or reset? If it happened today, then the HKD would almost certainly rise although it is by no means clear how high it would go. In any event, a rise in the HKD would be largely bad news for for me (and, I suspect, many people in Hong Kong):

1. I am paid in USD - a rise in HKD would act as an immediate pay cut

2. many Hong Kong listed companies have underlying assets or earnings that are denominated in foreign currencies. A rise in the HKD makes these worth less so I would expect locally listed shares  to decline in value. Worst hit will be the companies which have non-HKD revenue streams but HKD expenses (e.g. a Hong Kong head office)

3. the value of over seas assets and local assets priced in non-HKD would fall (e.g. overseas property, gold)

4. interest rates would rise - the cost of servicing my mortgages would go up

5. Hong Kong would be a less attractive (i.e. more expensive) place for international companies to operate from (more expensive). I would expect there to be downward pressure on both rents and prices in the property sector (and salaries)

In the good news department, my Hong Kong dollars would be worth more so buying assets outside Hong Kong would be cheaper.

I'm not planning on betting on the peg going - that has been an exercise in futility for many over the last 29 years - but I have to wonder what would happen and how to protect myself if it did.


Anonymous said...

Nice post just a small comment though
For the most expats in Hong Kong I know, they are paid in HKD. It is the case for me as well.

traineeinvestor said...


Thanks for dropping by.

I suspect you are correct, although I do know a resonable number who are paid in either GBP or USD.


Anonymous said...

Hi - Thanks for the write up and so relevant in 2016! Any thoughts to the recent events? Seems like bets are on for the peg to end. Haven't really heard much from the HKMA in the last couple of days.

traineeinvestor said...

Thanks for dropping by. A very relevant question given recent events.

At some stage the peg will go and there have been plenty of times when it has been under considerable pressure (either up or down) over the 30+ years of its existence. During that time, people who bet against the peg always lost money.

While I have no idea whether things will be different this time, I am unable to convince myself that the likelihood of the peg breaking or being adjusted now is high enough to justify the cost of taking steps to protect myself should it happen.

Anonymous said...

Understood that we have no idea whether / when the peg might break. But if the HKD were to float, would you care to speculate (again we can only guess) whether it would soar or crash?

traineeinvestor said...

Good question and the short answer is that while there have been times when it was obvious whether the HKD would rise or fall, right now it is very unclear and much would depend on the circumstances and how the HKMA and PBOC managed the move to a free float.

All that being said, HK people have a long history of panicking over financial matters and, looking at the HKMA data, they have a lot of cash to panic with so there is a good chance that it would decline initially (absent political intervention).