Billionaire Bill Ackman said that his hedge fund Pershing Square Capital Management has taken a significant short position against the Hong Kong dollar and expects the currency’s peg to the U.S. dollar to break soon.
Ackman shared Richard Cookson’s article, “Pressure on the Honk Kong Dollar Peg Keeps Building,” published on Bloomberg that talked about the peg becoming untenable and may need to be abandoned amid rising pressure in the Asian financial center. Cookson said that this was primarily owing to China’s political interference and hawkish policies of the Federal Reserve that would have adverse effects on Hong Kong’s economy, which is reeling under surging debt, and falling asset prices.
“This is a very thoughtful piece and I agree. We have a large notional short position against the Hong Kong dollar through the ownership of put options. The peg no longer makes sense for Hong Kong and it is only a matter of time before it breaks,” said Ackman in a tweet, adding, “If China is indeed a strong, independent sovereign, why does it need to peg its currency and that of Hong Kong’s to the U.S. dollar?”
Cookson argues that the Hong Kong economy had contracted by 4.5 percent in the third quarter compared to 2021, and the benchmark Hang Seng index is down nearly 50 percent since its 2018 high. In this scenario, when the monetary authorities follow the Fed—because of the USD peg—and raise rates, they can only resort to increasing government spending in order to balance the unfavorable effects of hiking interest rates.
Besides this, Cookson pointed to China’s interference which has led to a decline in high-earning financial workers who have left the city, eroding its tax base.
HKMA Actions to Maintain Stability
The Hong Kong dollar has been pegged since 1983 and held in a tight band between 7.75 and 7.85 per U.S. dollar. Every time interest rates go up, there have been unsuccessful, till now, speculative challenges to the peg.
The Hong Kong Monetary Authority (HKMA) parallels the policies of the Federal Reserve, and recent rate hikes have depleted the Asian financial center’s liquidity. “If you bet against the Hong Kong dollar, you are bound to lose,” Paul Chan, Hong Kong’s financial secretary told an audience at an investment summit in the city, as authorities sought to allay fears and discourage speculators.
While a break in the peg would disrupt financial markets, it is unlikely to happen because of the adequate foreign exchange reserves—approximately $417 billion—held by HKMA, according to some analysts.
“I don’t see any signs of stress on the peg,” said Kelvin Lau, senior economist for greater China at Standard Chartered, cited in The Financial Times.
Although the Hong Kong dollar’s rate has repeatedly tested the weak end of its trading band in 2022 and forced multiple interventions by HKMA, Lau said, “that’s part of the design of the peg, and it’s operating as it should.”
During the past six months, the Hong Kong dollar has remained near the weak end of its U.S. dollar trading band at HK$7.85.
The Hong Kong dollar peg allows Chinese companies to raise cash in U.S. dollars while staying in China. According to HKMA, there are no plans at the moment for changing the system.
As of Thursday, 11:58 a.m., 1 USD is trading at 7.808 Hong Kong dollars.