Bill Ackman wants to break Hong Kong’s peg to the U.S. dollar

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Bill Ackman, founder and CEO of hedge fund Pershing Square Capital Management, is betting against the Hong Kong dollar.

The Hong Kong dollar, the currency used by the semi-autonomous Chinese city, trades within a narrow band of 7.75 and 7.85 Hong Kong dollars to the US dollar, in a parity that has survived for nearly 40 years. However, the weakening of the Hong Kong dollar, which has forced the city government to intervene in the forex market 40 times this year to preserve the stake, is leading some to think that the stake will eventually fall.

“Pegity no longer makes sense for Hong Kong and it is only a matter of time before it is broken”, Ackman tweetedrevealing that his fund has a “large notional short position against the Hong Kong dollar.”

Ackman was responding to a Bloomberg opinion column by fund manager Richard Cookson, who argued that the Hong Kong government would be forced to increase spending (and therefore debt) to help recover its COVID-battered economy.

Pershing Square Capital Management did not immediately respond to a request for comment.

supporting the peg

The Hong Kong dollar has traded near the top of its band for much of the year as traders sold the currency in favor of the higher-yielding US dollar. (The US dollar has strengthened against many of the world’s currencies due to aggressive interest rate hikes by the US Federal Reserve to control inflation.)

The Hong Kong Monetary Authority (HKMA), the city authority de facto central bank—has had to tap its foreign exchange reserves to preserve the peg, selling its US dollar assets to buy Hong Kong dollars on the foreign exchange markets. The HKMA has bought 241.2 billion Hong Kong dollars so far this year, in the most aggressive intervention policy in its history.

The currency peg also forced the HKMA to raise interest rates along with the US Federal Reserve, to prevent traders from abandoning the local currency to seek higher US yields.

The rate hike is bad news for Hong Kong’s economy, which fell 4.5% in the third quarter year-on-year. The city government blamed the contraction on reduced exports due to a worsening global economy, but Hong Kong’s business community also blames the city’s inbound travel restrictions for suppressing the city’s advantages as a hub. financial and tourist destination.

Rising rates are holding back the city’s real estate market, which is the most expensive in the world. In October, Goldman Sachs predicted that house prices could fall as much as 30% by the end of 2023, compared to prices in 2021.

‘You’re bound to lose’

Despite this economic pressure, most observers believe that the Hong Kong dollar is not under threat.

The reason is the HKMA’s US dollar reserves, which total $417.2 billion at the end of September 2022, or around five times the total number of Hong Kong dollars in circulation. (That is down from $496.8 billion by the end of 2021.) Hong Kong’s foreign exchange reserves are the eight largest in the world.

“If you bet against the Hong Kong dollar, you are bound to lose,” Paul Chan, the city’s finance secretary, told a summit of global bankers in Hong Kong earlier this month. “You can check my advice with certain hedge fund managers in the US who have been wrong time and time again about the Hong Kong dollar,” she continued.

The British colonial government pegged the Hong Kong dollar to the US dollar in 1983 in an attempt to restore economic certainty amid negotiations to return the city to China. The peg has survived almost unchanged ever since.

the greatest threat to parity occurred during the Asian financial crisis in 1997 and 1998, when short sellers led by George Soros tried to target the Hong Kong dollar. In August 1998, the HKMA spent about $15 billion, or 18% of its reserves at the time, to fight speculators. soros later praised the HKMA, saying that it “did a very good job defending the Hong Kong dollar”.

It’s not the first time

Thursday’s disclosure is not the first time Ackman has pointed to Hong Kong’s peg to the US dollar. In 2011, Ackman foretold that the Hong Kong government would be forced to revalue the Hong Kong dollar at 6 HK dollars to the US dollar, pending an eventual peg to the yuan. At the time, Hong Kong was forced to match low interest rates in the US despite its booming economy, sparking consumer inflation and property speculation.

The pressure on the Hong Kong dollar has weakened in recent days. The Hong Kong dollar is trading at HK$7.8059 per US dollar, falling from the upper end of its trading band.

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