Hong Kong Monetary Authority vows short sellers will not find it easy to mount assault on Hong Kong dollar
By Eric Ng 27 Jan 2016
A more robust system for local banks to obtain liquidity and an enlarged monetary base make it near impossible for currency speculators to mount a successful attack on the Hong Kong currency, according to the Hong Kong Monetary Authority, which said there’s few parallels with conditions today and those in 1997 to 1998 which saw authorities launch a shock and awe defence of the financial system at the height of the Asian financial crisis.
Howard Lee, the HKMA’s executive director responsible for monetary management, said the changed circumstances compared to almost 20 years ago when the crisis happened means it is more difficult for speculators to short-sell the Hong Kong dollar to push up interest rates and cause wider financial markets turbulence. To do so would require speculators to muster hundreds of billions of Hong Kong dollars.
“It is now very difficult for “double play” to work because the Hong Kong dollar monetary base is now much bigger than that in 1997-98,” he said in a statement posted on the authority’s web site on Wednesday.
Double play refers to the strategy used by speculators in the Asian crisis of shorting stocks and Hang Seng Index futures, followed by short-selling of Hong Kong dollar to push up interest rates, so as to create panic in the wider financial markets to reap huge profits on stocks and index futures and currency bets.
Lee said unlike in 1998 when the Hang Seng Index comprised primarily interest rates sensitive property and bank plays, it has a much broader industry representation and is less sensitive to interest rate movements.
Hong Kong stocks are also much cheaper based on price-to-earnings and price-to-book value multiples compared to 1997, leaving less room for speculative attacks to succeed.
His comments came after recent weakness of the Hong Kong dollar, the yuan and local stocks. Some have expressed concerns about a re-run of the Asian crisis which began in Thailand and spread like a contagion across the region, with sharp increases in interest rates pushing Hong Kong stock and property prices lower, eventually leading to a painful, protracted recession.
It also came after George Soros, who gained fame for his success speculating against the British pound in 1992 and the Malaysian ringgit and Thai baht in the Asian financial crisis of 1997/98, said last week that a hard landing in the Chinese economy was “unavoidable” and that he was shorting Asian currencies.
Chinese state media Xinhua this week warned those engaging in “reckless speculation and vicious shorting will face higher trading costs and possibly severe legal consequences.
Lee said recent Hong Kong dollar weakness “is a normal phenomenon amid widening interest rate differentials between the Hong Kong dollar and US dollar after the US rate hike.”
The Hong Kong dollar 12-month futures traded as low as 7.89 last week, the weakest since 1999, igniting concerns over whether the currency peg would remain in place. [The Hong Kong Monetary Authority (HKMA) Chief Executive, Norman Chan Tak-lam attends a press conference to announce the investment results of the Exchange Fund as of the end of 2015 at HKMA in Central. Photo: K. Y. Cheng, SCMP] The Hong Kong Monetary Authority (HKMA) Chief Executive, Norman Chan Tak-lam attends a press conference to announce the investment results of the Exchange Fund as of the end of 2015 at HKMA in Central. Photo: K. Y. Cheng, SCMP
“The weakening of the Hong Kong dollar forward rate to below 7.85 does not mean that the market is speculating on an imminent depeg of the Hong Kong dollar with the US dollar,” Lee said.
He noted that Hong Kong’s current monetary base of HK$1.6 trillion far exceeds the HK$190 billion in 1998. The city’s foreign reserves of US$360 billion significantly outpace the US$70-US$90 billion in 1998.
The HKMA’s introduction of a mechanism in 1998 to provide banks access to overnight Hong Kong dollar liquidity via repurchase transactions using Exchange Fund bills and notes that currently amounts toHK$850 billion, has also dampened excessive volatility in interest rates, he added.
He also sought to allay fears that interest rates will soar to levels reminiscent to the 280 per cent overnight Hong Kong inter-bank offered rate (Hibor) seen during the Asian crisis.
“We expect that even if the Hong Kong dollar interbank rates would continue to rise in response to [fund]outflows, the pace of the increase would not be as rapid as that seen in 1997-98,” he said.