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the Hong Kong Dollar? Wait a minute...I want to sell it short first!
When the
Thai baht collapsed in July 1997 other Asian currencies fell like
dominoes. Only the Hong Kong dollar and the Chinese yuan remained
standing. The voices calling for the Hong Kong dollar’s “peg”
to the US dollar to be abandoned became deafening.
The Hong Kong dollar was “pegged” to the US dollar in
October 1983 — after Hong Kong’s Money Panic almost destroyed
the value of Hong Kong’s currency.
It’s amazing how fast people forget. I wrote this article
to remind them.
If Hong Kong ever abandons
the peg, I hope we get some warning: I want to sell all my Hong
Kong dollars first.
More than that: I’ll mortgage everything I own and short the
bejeezus out of the Hong Kong dollar. If the peg goes, the Hong
Kong dollar will sink like the Titanic, straight to the bottom.
I expect to make a fortune.
Unlike the Pollyannas who are calling for the peg to be abandoned,
I vividly remember Hong Kong’s Money Panic. Just as you do,
if you were here in September, 1983.
The dollar’s slide into free fall began after Mrs. Thatcher
went to Beijing to discuss Hong Kong’s future with Deng Xiao-ping
in December 1982. The Hong Kong dollar then stood at HK$6.55 to
the US dollar.
Hong Kong’s currency fell slowly all through 1983. As editor
of the World Money Analyst at the time, it was my business
to forecast the markets. I could see that the Hong Kong dollar was
going to collapse. So all year I ran ads in the Post for
my investment newsletter headlined: “My next target for the
HK dollar is HK$8.40 to the US$.”
Then-Financial Secretary, Sir John Bremridge, was overheard to comment:
“$8.40 to the US dollar? Never happen!”
On Monday, September 19th, 1983, the Hong Kong dollar hit $8.40
to the US dollar on the nail — and he had to eat his words.
Hong Kong’s
Money Panic
That was the week of Hong Kong’s Money Panic, the week that
the people of Hong Kong started a run on the currency and headed
for the exit doors en masse.
The latest round of Sino-British talks wasn’t going too well.
On Friday, September 23rd, the Hong Kong dollar sank to $8.83 per
US$. On Saturday, people were so desperate to get rid of their Hong
Kong dollars, the banknote rate went as low as HK$10 per greenback
— and by the middle of the morning most banks and currency
dealers had completely run out of US dollars!
Enormous lines formed at gold dealers’ windows as people rushed
to convert their Hong Kong money into real assets — anything
would do.
Saturday’s close of business didn’t stop the Panic:
people simply went to the supermarket. By Sunday afternoon all stores
had been cleaned out of rice and cooking oil. Supermarkets had enormous
gaps on their shelves as people stocked up on storable goods in
anticipation of spiraling prices the following week.
While uncertainty about 1997 triggered the collapse of the Hong
Kong dollar, the seeds had been planted much earlier: when Financial
Secretary Sir Philip Haddon-Cave took the Hong Kong dollar off its
peg to sterling. (That’s right, our currency used to be linked
to sterling, just as it’s now linked to the US dollar.)
That happened in 1972, when most of the currency analysts whose
names you see in the paper today were still pedaling their bikes
to school.
John Greenwood, architect of today’s US dollar peg, warned
that this action would lead to a disaster for the Hong Kong dollar.
Sir Philip pooh-poohed Greenwood’s comment — but in the
end it was Sir Philip who was wrong and Greenwood who was right.
The growing chorus of people who want to abandon the Hong Kong dollar
peg would do well to remember why it was introduced: to end Hong
Kong’s Money Panic.
Because that’s what will happen again, if they get what they
want.
With currency speculators prowling the markets of the world, billions
of dollars jangling in their deep pockets, the next Panic won’t
take ten years to develop: if we’re lucky, we’ll have
ten days.
The moment the peg is abandoned, every currency speculator from
George Soros on down will pile in and sell the Hong Kong dollar:
there’s nothing speculators like more than a sure thing. They’ll
be joined by everyone in Hong Kong, and all the billions of US dollars
in the coffers of Hong Kong’s Monetary Authority are unlikely
to be enough to halt the wave of selling, any more than the Bank
of England could halt the run on sterling in 1992.
Why the peg protects
us
Few people understand the esoteric monetary mechanics of Hong Kong’s
monetary system: if they did, no-one would be crying “Get
rid of the peg.” The peg corrects a fundamental flaw in Hong
Kong’s monetary system — a flaw that John Greenwood
understood and Sir Philip Haddon-Cave did not. Without the peg,
Hong Kong’s banks can create their own reserves, so there’s
no limit to the supply of Hong Kong dollars. Without the peg, the
Hong Kong dollar has no bottom.
Abandoning the peg will bring back the currency regime that caused
Hong Kong’s Money Panic in 1983 — the Panic that the
establishment of the peg brought to an end.
Those analysts who call for abandoning the peg should realize the
fallacy of the arguments they make to support their position:
· High Interest Rates. Hong Kong
interest rates have gone up, sure — but they’re nothing
like as high as interest rates in Thailand, Indonesia, the Philippines
and South Korea.
· Tourism Slump. Yes, Hong Kong’s
tourist industry is suffering right now. But thanks to the peg,
we can now take cheap holidays just about everywhere in Asia.
· Property Collapse. Property prices
have come down. Despite higher interest rates (which will eventually
fall), Hong Kong property is now more affordable — the policy
of every Hong Kong government I can remember. This is a problem?
· Stock Market Crash. Some people
lost money when the Hong Kong market collapsed. That’s happened
before and will happen again — with or without the peg. (And
those who kept their cool — and kept their cash — can
now scoop up bargains on the stock markets of Asia, including Hong
Kong.)
· Hong Kong’s Too Expensive.
(So what’s new?) Costs in Singapore — and elsewhere
in Asia — have fallen. Well, they were cheaper to start with,
and businesses have been moving all or part of their operations
out of Hong Kong for years. Just as other businesses have been setting
up shop here, because Hong Kong will always have two advantages
over Singapore: it’s the financial capital of China, and China’s
premiere deepwater port...it will never be cheaper to transship
Chinese goods via Singapore, no matter how low the Singapore dollar
goes.
And, finally, these Pollyannas should realize that the only people
who relish currency uncertainty are currency speculators.
A stable Hong Kong dollar benefits everyone whenever they go into
Wellcome or Park ‘n Shop. How many items on those shelves
are made in Hong Kong? All the imported ones would be way more expensive
without the peg. Should we ask everyone in Hong Kong to take a pay
cut through higher prices...just to bail out Cathay Pacific and
Li Ka-shing?
If it ain’t broke, why fix it?
In the 14 years since Hong Kong’s peg to the US dollar was
introduced, the pound sterling left Europe’s currency system,
the ERM, in ignominy, the Bank of England hundreds of millions of
dollars poorer; the yen has bounced around like a rubber ball; the
German mark and the Swiss franc have become currency havens of yesteryear;
and countless South American currencies — and now the Russian
ruble — went where the Hong Kong dollar was going until the
peg stopped the Panic dead in its tracks.
And the peg passed its severest
test with flying colors just these last few months, when all the
currencies around us except for the yuan went into free fall. The
Hong Kong Monetary Authority even made a profit from the speculators
— while the countries around us had to go hat in hand to the
IMF for relief.
Let’s be clear on what this chorus of voices from the peanut
gallery is asking of us:
· they want us to pay 20%, 50%, even 100% more for almost
everything we buy at the supermarket (without the peg, the Post,
which is printed on imported newsprint, could cost HK$12, even $25
a copy, not $7);
· they want to slash the value of our savings in half, just
to help the tourist industry and a few highly-leveraged property
developers through a temporary slump. (And do they think 20% to
40% interest rates will really do much for the property market?)
They must be crazy!
If you were here in September 1983, you’ll agree that the
current crisis is nothing compared to Hong Kong’s Money Panic.
(If you weren’t here then, ask someone who was.) Back then,
the very foundations of Hong Kong’s economy were crumbling.
People were scared of what tomorrow would bring.
Abandon the peg and that is what you’ll bring back. Abandoning
the peg means abandoning the 14 years of currency stability the
peg has given Hong Kong. Abandoning the peg to alleviate some mild
and temporary economic pain is like committing suicide to cure a
cold.
But if the peg is abandoned, what should you do? Run to the bank,
mortgage everything you own, borrow as many Hong Kong dollars as
you can — and then some — and sell the lot for as many
US dollars as you can get.
But you’ll have to act fast to beat the rush.
*****
For more background on the Hong Kong dollar see
Hong
Kong’s Money Panic.
Copyright
© 1998 by Mark Tier
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