đ
US - China | Why HK's $440B Reserve Can't Defend USD to HKD - YouTube
Channel: Lei's Real Talk
[0]
If you have any investments or businesses
in Hong Kong, then you might be concerned
[4]
with its Linked Exchange Rate System.
[7]
On July 14th, the U.S. announced it would
revoke several provisions of the United States-Hong
[11]
Kong Policy Act of 1992.
[14]
Hong Kong will lose its special status and
will face the same tariffs imposed on mainland
[19]
China.
[20]
This move further raised the question of whether
the peg between the Hong Kong dollar and the
[24]
US dollar will continue.
[27]
As discussed in a previous video, Kyle Bass,
the founder of Hayman Capital, has been betting
[32]
that this currency peg will break since last
year.
[35]
In June, he made the same bet with 200-to-1
leverage.
[40]
So will the U.S. break the Peg?
[42]
How will Hong Kong and Beijing Respond?
[44]
And what will be the likely outcome?
[47]
The Linked Exchange Rate System In 1983, Hong
Kong experienced a currency crisis partially
[54]
caused by concerns over the Sino-British negotiations
over handing the city back to China, known
[60]
as the âBlack Saturday.â
[61]
The Hong Kong dollar dropped to its historic
low of 9.3 per US dollar, and stores began
[68]
accepting US dollars only.
[70]
To save its financial system, Hong Kong started
pegging its currency to the US dollar on October
[75]
17th, 1983, which is known as the Linked Exchange
Rate System.
[81]
The peg means that the Hong Kong Monetary
Authority will buy US dollars with Hong Kong
[86]
dollars when the US dollar is weak.
[89]
It will buy Hong Kong dollars with US dollars
when the US dollar is strong.
[94]
The goal is to have the exchange rate kept
between 7.75 to 7.85 Hong Kong dollars per
[101]
US dollar.The Linked Exchange Rate System
has helped maintain the marketâs confidence
[106]
in the Hong Kong dollar.
[107]
And so far, it has survived the 1997 Asian
Financial Crisis and the 2008 Financial Crisis.
[114]
But this time is very different.
[117]
Hong Kong now finds itself caught in the new
U.S.-China cold war.
[122]
Will the U.S. Break the Peg?
[125]
According to statistics published by the Pew
Research Center on April 21st, about 90% of
[130]
Americans believe China is a threat, including
62% who believe it to be a major threat.
[137]
Seeing the Chinese Communist Party as an enemy
to the free world has become the consensus
[142]
between the Democrats and the Republicans.
[145]
Since the CCP violated the Sino-British Joint
Declaration by enforcing its national security
[150]
laws for Hong Kong, the U.S. has been taking
stronger actions against the authoritarian
[155]
regime.
[156]
The CCP will not voluntarily give up its power
and control over Hong Kong.
[161]
Therefore, this trend will likely continue
regardless of which party will take power
[165]
in the US after November.
[168]
The U.S. has an extreme but straightforward
option to end the Linked Exchange Rate System
[173]
by limiting banksâ ability to sell US dollars
to mainland China and Hong Kong.
[178]
Kevin Lai is the chief economist for Asia
ex-Japan at Daiwa Securities Group Inc. in
[184]
Hong Kong.
[185]
He suggested that a more extreme approach
would be cutting Hong Kong from the Society
[189]
for Worldwide Interbank Financial Communication
used for clearing global transactions.
[194]
âThatâs a nuclear option -- itâs unlikely
but not impossible,â he said.
[199]
âWithout access to the global U.S. dollar
pool, the Hong Kong dollar will not be functional.â
[205]
But according to the BBC, there are still
1,300 US companies and 85,000 Americans in
[211]
Hong Kong.
[212]
As of 2019, American banks in Hong Kong had
166 billion dollars in assets.
[219]
The ties are still close.
[221]
Therefore it is unlikely that the U.S. will
end all of its trade with Hong Kong and ban
[226]
the Hong Kong dollar all of a sudden.
[229]
Instead, we shall expect to see a more gradual
and targeted approach in weakening the Linked
[233]
Exchange Rate System.
[235]
On August 7th, the U.S. announced sanctions
on Hong Kong and CCP officials, including
[241]
chief executive Carrie Lam and the head of
police.
[244]
The U.S. might keep enforcing sanctions on
specific individuals, companies, financial
[249]
institutions, and government bodies, and limiting
their access to the global transaction clearing
[254]
systems like SWIFT.
[257]
Building House on the Sand But even if the
U.S. doesnât take direct actions against
[262]
the Hong Kong dollar, the Linked Exchange
Rate System's foundation has shifted.
[266]
In 2015, an IMF working paper concluded that
mainland China had a more profound influence
[272]
over Hong Kong's economy in the long term.
[275]
But in the short-term, Hong Kong's business
cycles tend to better match with the United
[280]
States.
[281]
And therefore pegging its currency to the
US dollar seemed appropriate.
[285]
But many things have happened since 2015.
[288]
And likely the economic dynamics will not
last.
[291]
The marketâs confidence in the Hong Kong
dollar has been partially derived from the
[296]
cityâs high level of openness and compatibility
with the western financial and legal systems.
[301]
With the new Hong Kong Security Legislation,
the CCP will continue to destroy Hong Kong's
[307]
rule of law and freedom, making the once semi-autonomous
city more similar to mainland China and the
[313]
Hong Kong dollar more like the Chinese yuan.
[316]
Also, as Hong Kong loses its special status,
its trade volume, and, therefore, economic
[321]
ties with the U.S. will likely decline over
time.
[324]
The correlation between Hong Kong and U.S.
economies might decrease dramatically.
[329]
And Hong Kong will find it harder to follow
the U.S. monetary policies, which include
[334]
raising and lowering interest rates.
[336]
On the other hand, Hong Kong's economic performance
will have an even higher correlation with
[341]
mainland China.
[343]
And don't forget that China's economy has
already been decoupling from the United States.
[348]
Those who believe that the U.S. can defeat
the CCP will probably transfer their wealth
[353]
out of Hong Kong.
[355]
Maybe the Hong Kong dollar can hold onto the
peg for a while.
[359]
Eventually, the foundation of the Linked Exchange
Rate System has started shifting beneath it,
[363]
just like a house built on sand.
[365]
But will the Hong Kong government and the
CCP sit back and watch that happen?
[371]
How will Beijing and Hong Kong Respond?
[374]
On June 2, the Hong Kong Monetary Authority
claimed to have over 440 billion US dollars
[380]
in its foreign currency reserve, more than
twice the cityâs monetary base and enough
[384]
to defend the Linked Exchange Rate System.
[387]
On top of that, Hong Kongâs Financial Secretary
Paul Chan Mo-Po claimed that the city has
[393]
a currency swap arrangement with Beijing.
[395]
Through the agreement, the Peopleâs Bank
of China will provide Hong Kong a quota worth
[400]
over 57 billion US dollars as needed to support
the currency peg.
[404]
Beyond that, Beijing might provide additional
support using its foreign currency reserve
[405]
of 3.1 trillion US dollars.
[406]
It seems Hong Kong will put up a strong defense
for its currency.
[408]
But is it the actual case?
[410]
The Risky and Expensive Defense Assuming Hong
Kong's foreign reserve is, as reported, twice
[416]
its monetary base, the question is whether
this ratio is meaningful.
[420]
The monetary base does not represent all the
currency in the economy that can be used for
[425]
transactions such as buying US dollars.
[428]
Instead, it might be more relevant to use
Hong Kong's monetary supply.
[433]
Here we use M2, which represents the amount
of currency in the form of cash or can be
[438]
easily converted to cash.
[440]
Hong Kong's foreign reserve plus the quota
from Beijing is just over a quarter of its
[444]
M2 money supply of about 1.95 trillion U.S.
dollars.
[449]
Therefore, the Hong Kong Monetary Authority
might not have enough to defend the dollar
[454]
peg against a potential rush for the US dollar
combined with short selling by speculators
[459]
like Kyle Bass.Now the question is: how likely
will Beijing provide support beyond the 57
[465]
billion?
[466]
On the surface, 57 billion is just a change
of Chinaâs 3.1 trillion-dollar foreign reserve.
[472]
But how much of the 3.1 trillion is available
for Beijing to use freely?
[477]
The answer is not a lot.
[479]
According to an article by the Commercial
Times, China has over 2 trillion US dollarsâ
[482]
worth of external debt, which will have to
be repaid using its foreign currency reserve.
[487]
The reserve includes around 540 billion dollars
of direct foreign investments, which technically
[493]
belong to foreign investors.
[495]
Beijing also needs two monthsâ worth of
import value set aside in case of an emergency,
[500]
which is estimated to be 360 billion dollars.
[503]
Subtracting these numbers leaves only less
than 150 billion dollars for Beijing to use
[508]
freely.
[510]
This number checks out with a Bloomberg article,
which stated that Chinaâs minimum foreign
[513]
reserve requirements amount to about 3 trillion
US dollars using the International Monetary
[519]
Fundâs criteria.
[520]
The calculation leaves Beijing with around
100 billion US dollars.
[525]
Keep in mind the 100-150 billion dollars will
have to be used to support both the Hong Kong
[531]
dollar AND the Chinese yuan.
[533]
If the above estimates were accurate, Beijing
seems overly generous by pledging over one-third
[538]
of it to Hong Kong.
[540]
And even if Hong Kong and Beijing have enough
reserves, defending the Hong Kong dollar is
[545]
not without costs.
[547]
In 1998, Hong Kong successfully defended against
George Sorosâ attempt to attack its currency.
[553]
But the move resulted in higher interest rates,
which caused asset prices to drop.
[558]
And now that Hong Kong's debt to GDP ratios
are way above their 1998 levels, the cost
[564]
of letting its interest rates rise might be
much higher.
[567]
As Mr. Kevin Lai put it, quote: âItâs
not a question of whether the peg will survive
[571]
but a question of at what cost.â
[573]
Although the foundation has started shifting,
Beijing and the Hong Kong government are expected
[578]
to continue supporting the Linked Exchange
Rate System to maintain market confidence.
[583]
But how much faith will the public have in
it?
[585]
Going Forward The Chinese Communist Party
has practically thrown away the Sino-British
[590]
Joint Declaration.
[591]
As the U.S.-China cold war goes on, tighter
controls by the CCP means Hong Kong and its
[597]
currency will likely decouple from the U.S.
at an accelerating speed.
[601]
Western countries, including the United States,
have introduced better immigration opportunities
[606]
for Hong Kong citizens.
[608]
Some investors and residents seeing the trend
are already leaving the once free and prosperous
[613]
city, causing capital outflows from Hong Kong.
[616]
As Confucius once said quote: âA wise one
will not enter a tottering state and will
[621]
not dwell in a disorganized one.â
[624]
How long do you think the Linked Exchange
Rate System will last?
[627]
Leave your comments below.
[628]
Thank you for watching Unseen Fortunes.
[631]
If you enjoyed our content, please click like,
subscribe, and share.
[635]
Weâll see you next time!
Most Recent Videos:
You can go back to the homepage right here: Homepage