COMMENT Hong Kong mistaken in backing
dollar peg By Henry C K Liu
Efforts by the Hong Kong Monetary
Authority to hold down the value of the local
currency compared with the US dollar, backed by
the injection of almost US$14 billion since
October 19, are doomed to fail - and hedge-fund
investor William Ackman is placed to get rich.
Increasing amounts Chinese currency, the
yuan, flowing into the city are putting pressure
on the peg linking the HK dollar to the US
currency. The peg has been in place since 1983,
and since 2005 limits the currency's movement to
between HK$7.85 and an upper limit of HK$7.75 to
the US dollar.
Ackman, the founder of New
York-based Pershing Square Capital Management LP
said on October 20 he was keeping his call
contracts on the Hong Kong dollar and suggested it
be revalued
30% higher, according to a
Bloomberg report on January 14. Ackman's
cash-backed views were dismissed this week,
Bloomberg reported, by K C Chan, the city's
secretary for financial services and the treasury.
"There is no question about the peg at
all. He will be disappointed. I don't expect him
to realize his bet," Chan said in an interview
with Bloomberg, in a renewal of his pledge to
local legislators last October, when according to
the South Morning Post he told legislators: "We
have no plans to change the Hong Kong dollar peg."
It is a view shared by all but one of the 20
analysts polled by Bloomberg in November, the news
outlet reporting then that the bulk of analysts
expected the fixed exchange-rate system to last
for at least five more years.
The market
is on Ackman's side. The HK dollar will have to be
pegged to the yuan as a matter of time, which
means it must depeg and rise against the US
dollar. The HK Monetary Authority will only be
throwing good money after bad, not just
temporarily, but on a permanent track.
It
may have the deep pocket to out bet Ackman, but
not the market because the cost of defending the
HK dollar's peg to the US dollar will exceed its
benefit soon, even if the HKMA has the HK dollars
to keep buying US dollar at market rate.
As the US dollar falls against the yuan,
the HK dollar, pegged to the US dollar, will lose
purchasing power in China.
That is a huge
penalty that cannot be neutralized by the peg. HK
trade with China has already overtaken HK trade
with the US, making the currency peg to the US
dollar irrational. This trend will continue; the
only volatility will be the pace, not the
direction.
The HKMA is falling into a trap
of buying a fiat currency with long-term downward
valuation - not a smart move if the loss cannot be
neutralized with trade benefits.
If Ackman
can sustain his bet, he will make a pile of money
at Hong Kong's expense.
Henry C K
Liu is chairman of a New York-based private
investment group. His website is at
www.henryckliu.com
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