Float 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.