Hong Kong Dollar
Stephen Howard
Chief Executive Officer | Board Advisor | Equity Derivative, Portfolio and Treasury Financing | Expert Witness | Non-Executive Director
On Wednesday Kyle Bass released his first investor letter in three years, “The Quiet Panic” articulating his thesis on the Hong Kong currency peg. Kyle’s investor letter has been reproduced by the team at Zerohedge and offers a very detailed hypothesis.
The thesis offers a thorough background to the current market backdrop, I wanted to highlight points to help shape your thoughts and the merits of the position and not disregard this as "Kyle Bass being a China bear" so you will want to read it in full and consider the content.
Monetary Policy & Divergent Interest Rate's
-With a fully transferable currency, why are HKD rates trading 0.80% under US Rates, can this be sustainable going forward? The document considers how the HKMA Reserve Balances have been utilised over the past 18 months. This is not a standalone perspective, there have been several FT, Reuters and Bloomberg discussions on this topic in the past six months.
Over Heated Property Market
-Office, Residential & Retail property price indices have rallied by over 400% post-2009.
Banking System Leverage
-According to the letter Hong Kong banking assets to GDP currently stands at 850% of GDP, it's been nearly this high before in 1991, I'd warrant all the drivers are significantly different.
United States-Hong Kong Policy Act (1992)
-The potential for Hong Kong to be in breach of this agreement, and US-Hong Kong trading relations to become obstructed.
China’s USD funding Source
- Hong Kong is China's primary source for USD fund raising across its capital market structures, more so now with the inclusion of both Bond Connect and MSCI re-weighting China's participation.
The Hong Kong the property market feels egregious at this point in the economic cycle. Spending USD$3.3million for a ~1000 square foot apartment in a 25-year-old building with few amenities feels way overpriced by any measure. This is also not the exception by any means. However like most in Hong Kong, we say this and whoops, the market continues to rally, this time though, I wonder if all the components are really there to continue making this a sustained property market rally?
As always it’s an interesting time in the markets and maybe Kyle’s thesis will play out, alternatively though, if not, then the housing market in Hong Kong may be in for a re-valuation to the downside which would leave the Hang Seng starting to look rather over-extended.
So agree or disagree with his hypothesis as he said in a CNBC interview this week, “….you can’t escape the numbers, however, it’s a matter of when and that could be six months or several years…”
Always happy to have comments and thoughts from everyone.
#China, #ForeignExchange, #HKD, #Hongkong, #HKMA, #GlobalMacro, #KyleBass, #Macro, #ZeroHedge
Chief Executive Officer | Board Advisor | Equity Derivative, Portfolio and Treasury Financing | Expert Witness | Non-Executive Director
5 年Some interesting commentary from the Telegraph re the HKMA from today (15th May) https://www.telegraph.co.uk/business/2019/05/14/hong-kong-sounds-alarm-chinese-capital-flight/amp/
Chief Executive Officer | Board Advisor | Equity Derivative, Portfolio and Treasury Financing | Expert Witness | Non-Executive Director
5 年A counter perspective from the folks at Macro Voices (Erik Townsend and Patrick Ceresna, CMT DMS CIM?that was provided in an interview with Louis-Vincent Gave?that walks through the construct of the HKD really well. ?? (https://www.macrovoices.com/554-hot-topic-louis-vincent-gave-rebuts-kyle-bass-investor-letter-questioning-hong-kong-s-relevance)
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5 年Thanks for sharing Stephen. It is a well-written and considered article by Kyle Bass. I agree with it in many parts. Undoubtedly HK has a very expensive property market and a bank sector which is very leveraged on Chinese growth, and in the next crisis these will cause a problem.? But in other parts I don't agree with what he writes. His worrying chart that shows HKMA excess reserves declining to worrying levels, I don't know where those numbers come from but they don't seem to match up at all with the reserves that are published by the HKMA. Reserves did dip in H1 2018, but have been increasing otherwise. I don't see any current pressure on the peg at all.? The second thing I don't agree with is his concern that HK is in imminent danger of losing favoured nation status with the USA. For a start the details of the proposed extradition law are not yet clear, and it's not even sure if and when it will pass into law (it's very unpopular with the HK population). Secondly, I doubt the USA will consider any new extradition law to be a serious breach of HK's autonomy - many sovereign countries extradite suspects to other countries, with no meaningful loss of sovereignty. And thirdly I haven't seen any signs that the US president considers these developments serious enough to change the US's recognition of HK as separate for trade purposes. I really cannot see the proposed extradition law having an effect on the HK Policy act of 1992. Having said all that, HK will (at some stage in the future) have a crisis, and will see pressure on the peg at that time. When it happens HKD forward points will go positive and HKD yields will rise above US yields. Anyone who is holding HKD at the moment, when it yields less than USD, is missing a trick. So I think the current situation, where HK has rates 80bp below US is indeed a great opportunity to put on a long USDHKD forward position. If nothing happens the trade will make positive carry, and when the next crisis arrives, it will make larger profits when the forward points flip positive.
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5 年Fascinating article and i agree with most of what the author is saying.?I have thought for a long time that to peg the HKD to the USD was ridiculous given the totally different economies. However, i still remember the result of betting against the peg in 97! I would say the logical thing to happen is the HKD gets pegged to the RMB. Beijing/Xi will be happy with this given it brings 2047 (end of one country two systems) even closer, like everything else that is happening in HK.
Chief Executive Officer | Board Advisor | Equity Derivative, Portfolio and Treasury Financing | Expert Witness | Non-Executive Director
5 年Happy to hear an opposing view, with reasons for the perspective.