Professional Documents
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Disclaimer
The analyses and conclusions of Pershing Square Capital Management, L.P. ("Pershing Square") contained in this presentation are based on publicly available information. Pershing Square recognizes that there may be confidential information in the possession of instruments of state, governments and other interested parties discussed in the presentation that could lead those constituents and other market participants to disagree with Pershing Squares conclusions. This presentation and the information contained herein is not investment advice or a recommendation or solicitation to buy or sell any securities, currencies or other investment instruments. All investments involve risk, including the loss of principal. The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things, historical and anticipated events, access to and changes in capital markets and the values of currencies, assets and liabilities. Such statements, estimates, and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant political, regulatory, economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations or warranties, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein and Pershing Square disclaims any liability with respect thereto. Actual results may vary materially from the estimates and projected results contained herein. Funds managed by Pershing Square and its affiliates own U.S. dollars, Hong Kong dollars and options on the Hong Kong dollar. Pershing Square manages funds that are in the business of trading - buying and selling securities and other financial instruments. It is likely that there will be developments in the future that cause Pershing Square to change its position regarding such investments. Pershing Square may buy, sell, cover or otherwise change the form of these investments for any or no reason. Pershing Square hereby disclaims any duty to any recipient hereof or to provide any updates or changes to the analyses contained here including, without limitation, the manner or type of any Pershing Square investment.
III. The Current State of Play IV. Our Prediction of What is Likely to Happen V. The Investment Opportunity
I. The Context
5
________________________________________________
Source: Bloomberg.
GDP U.S.
U.S. GDP is still below the Q4 07 peak
Annualized Real GDP (Billion USD, 2005 Dollars)
________________________________________________
Source: Bloomberg.
Unemployment U.S.
Unemployment in the U.S. remains stubbornly high at over 9%
Unemployment Rate (%)
________________________________________________
Source: Bloomberg.
Inflation U.S.
Inflation has picked up, but seems to have leveled off and is forecast to decrease
Consumer Price Index Growth (YoY)
________________________________________________
Source: Bloomberg.
________________________________________________
Source: Bloomberg.
Economic Weakness
Near 0% Short-Term Interest Rates through mid-2013 Multiple Rounds of Quantitative Easing
________________________________________________
10
U.S. Monetary Policy Will Remain Extremely Accommodative: The committee currently anticipates that economic conditions including low rates of resource utilization and a subdued outlook for inflation over the medium run are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013
- Federal Reserve statement, August 2011
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11
Source: Press, Release August 9, 2011 Board of Governors of the Federal Reserve System (http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm).
12
________________________________________________
Source: Bloomberg.
GDP Economy X
Economy X GDP is well above its peak
LTM Real GDP (Billion Local Currency)
________________________________________________
14
Unemployment Economy X
Unemployment is 3.4% and back to pre-recession lows
Unemployment Rate (%)
________________________________________________
15
Source: Bloomberg.
________________________________________________
16
Inflation Economy X
Inflation is accelerating and is now nearly 6%
Underlying Consumer Price Index Growth (YoY)
________________________________________________
Source: Monthly Report on the Consumer Price Index - Census and Statistics Department, Hong Kong SAR Government. (http://www.censtatd.gov.hk/products_and_services/products/publications/statistical_report/prices_household_expenditure/index_cd_B1060001_dt_detail.jsp).
17
Economy X
U.S.
________________________________________________
Source: Based on the latest available Bloomberg data. 18 Press Release, August 22, 2011 Census and Statistics Department, Hong Kong SAR Government (http://www.censtatd.gov.hk/press_release/press_releases_on_statistics/index.jsp?sID=2798&sSUBID=19062&displayMode=D).
Who is Economy X? Why would Economy X have the same monetary policy as the United States?
19
Economy X = Hong Kong Why Does Hong Kong share U.S. monetary policy? The Hong Kong Dollars (HKD) peg to the U.S. Dollar (USD) forces Hong Kong to import the U.S.s ultraaccommodative monetary policy, despite its much stronger economy
Sterling Peg
Free Floating
Dollar Peg
HKD Strength
________________________________________________
Source: Hong Kongs Linked Exchange Rate System Hong Kong Monetary Authority, p.34 (http://www.info.gov.hk/hkma/eng/public/hkmalin/index.htm).
23
Sterling
________________________________________________
Source: The Decline of Sterling: Managing the Retreat of an International Currency, 1945-1992 - Catherine R. Schenk, p.23.
HKD Strength
________________________________________________
25
Source: Hong Kongs Linked Exchange Rate System - Hong Kong Monetary Authority, p.34 (http://www.info.gov.hk/hkma/eng/public/hkmalin/index.htm).
HKD Strength
Sterling ends USD peg and two weeks later HKD is pegged to USD
________________________________________________
26
Source: Hong Kongs Linked Exchange Rate System - Hong Kong Monetary Authority, p.34 (http://www.info.gov.hk/hkma/eng/public/hkmalin/index.htm).
27
HKD Weakness
28
________________________________________________
Source: Bloomberg.
HKD/USD
HKD Weakness
________________________________________________
29
Source: Bloomberg.
________________________________________________
30
Source: Hong Kong SARs Monetary and Rate Challenges - Catherine Schenk, p149-50.
HKD Weakness
Creation of 7.75 to 7.85 Band Resumption of the USD peg, this time at 7.80 HKD/USD 98 Weak Side Intervention Commitment 05 Strong Side Intervention Commitment
Floating Rate
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31
Source: Bloomberg.
Why Did HK Choose the USD as an Anchor in 1983? US monetary policy established tremendous credibility in the Volcker era There was no other viable anchor Precious metals had been discredited and Sterling was a secondary currency The US was a major HK trading partner The USD was commonly used in international trade and finance The crucial factor is that there should be confidence that the anchor currency will be managed responsibly by its central bank. - Tony Latter, Former HKMA Deputy Chief Executive and coarchitect of the peg
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32
Source: Hong Kongs Money: The History, Logic and Operation of the Currency Peg - Tony Latter, p.56.
How do we know what the HK government was thinking when the peg was introduced in 1983? This publically available HK government policy memo details the HK governments thinking at the time:
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33
HK Has Been Responsive to Change Event: Silver appreciation (1935) Response: Sterling Peg Event: Sterling devaluation (1967, 1972) Response: Revaluation; Switch to USD Peg Event: USD devaluation (1973, 1974) Response: Revaluation; HKD Float Event: HKD Crisis (1983) Response: USD Peg
34
Hong Kong
Population: 7.1mm GDP by Sector: Finance 26%, Trade 27%, Public Administration 18%, Transportation 9% Economic Freedom: Ranked #1 for 17 consecutive years by the Heritage Foundation History: British colonial rule (18421997) Reversion to Chinese sovereignty (1997) One Country, Two Systems (1997-2047) Harmonization with the Mainland (2047 - Onward)
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Source: Hong Kong Yearbook 2010 - Information Service Department, Hong Kong SAR Government, p.49 (http://www.yearbook.gov.hk/2010/en/index.html). Picture - (http://www.expatify.com/hong-kong/navigating-the-residential-neighborhoods-of-hong-kong.html).
36
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Source: National Income and Balance of Payments - Census and Statistics Department, Hong Kong SAR Government, Table 32.
39
The LERS
Since 1983, the LERS has kept the HKD pegged to the USD at a rate of ~7.80 HKD/USD The HKMA has established a 7.75 to 7.85 HKD/USD trading band for the currency The price of the HKD is kept within the trading band through a series of arbitrage and automatic intervention mechanisms
Sustainable limit
________________________________________________
43 Source: Bloomberg. Estimates of Fundamental Equilibrium Exchange Rates - Peterson Institute for International Economics, p.3.
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44
Source: National Income and Balance of Payments - Census and Statistics Department, Hong Kong SAR Government, Table 42.
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45
Source: Bloomberg.
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46
________________________________________________
Source: Surplus - Public Account, Money and Finance - Census and Statistics Department, Hong Kong SAR Government, Table 192. Nominal GDP - National Income and Balance of Payments - Census and Statistics Department, Hong Kong SAR Government, Table 32.
47
________________________________________________
Source: Foreign Currency Assets - Bloomberg (Adjusted for HKD). 48 Nominal GDP - National Income and Balance of Payments - Census and Statistics Department, Hong Kong SAR Government, Table 32.
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49
Source: Bloomberg.
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50
Source: Nominal Major Currency Index - Board of Governors of the Federal Reserve System (http://www.federalreserve.gov/releases/h10/summary/default.htm).
The success of a currency board arrangement, and its acceptability to local people and businesses, depend to a considerable extent on the anchor currency being reasonably stable.
- Tony Latter, Former HKMA deputy chief executive and co-architect of the peg
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51
Source: Hands On, Hands Off?: The Nature and Process of Economic Policy in Hong Kong - Tony Latter, p.75.
52
________________________________________________
Source: External Trade - Census and Statistics Department, Hong Kong SAR Government, Table 60.
53
________________________________________________
54
The USD Peg Has Materially Reduced the Market Value of the HKD
55
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56
Source: BIS Real Effective Exchange Rates - Bank of International Settlements, Broad Index (http://www.bis.org/statistics/eer/index.htm).
HKD Weakness
The RMB has appreciated by 30% since 2005 and officials have indicated that it will continue to appreciate
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57 Source: Bloomberg. China will stick to gradual appreciation of Yuan: Wen - Economic Times (http://articles.economictimes.indiatimes.com/2011-03-15/news/28691614_1_wen-jiabao-growth-rate-exchange-rate).
Valuation Summary
Economist models and changes in trade-weighted real exchange rates indicate that the HKD is materially undervalued relative to a basket of its trading partners
Model
Decline in Real Trade-Weighted Value - Last 10yrs Goldman Sachs DEER Model Barclays PPP Model
%Undervalued(MultiLateral)
54% 26% 33%
Undervaluation
% Undervalued: % Undervalued = (7.80/Fair Value) -1
26%54%
________________________________________________
Source: Economic Research: GS DEER - Goldman Sachs, Q2 2011 Trade Weighted Misalignment. 58 Currency valuation from a macro perspective - Barclays Capital, June 14, 2011, p.3. Estimates of Fundamental Equilibrium Exchange Peterson Institute for International Economics, Real Effective Exchange Rate, May 2011.
________________________________________________
Source: Bloomberg.
________________________________________________
Source: Bloomberg.
At the time the peg was introduced, the HK government recognized the risks of tying HKs monetary policy to that of the US [D]omestic interest rates and domestic inflation will be substantially influenced by the behavior of the economy to whose currency it is tied (the USA in this case). It was, in essence, the potential effect of such ties upon the Hong Kong economy which led to the abandonment of the sterling link in 1972 and then the US dollar link in 1974.
- Hong Kong government policy memo, 1983
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61
The HKMA recently increased its 2011 inflation expectation to 5.5% from 4.5%
________________________________________________
63
Source: Monthly Report on the Consumer Price Index - Census and Statistics Department, Hong Kong SAR Government.
HK Residential Price Index (Centaline Property Centa-City Leading Hong Kong Index)
222% Increase
________________________________________________
64
Source: Bloomberg.
________________________________________________
65
Class A office market stats: Vacancy Rate: ~2% Rent (% yoy): ~+18% Cap Rates: ~3%
________________________________________________
Source: Half-Yearly Monetary and Financial Stability Report - March 2011 - Hong Kong Economy, HK Commercial Price Index , p. 38 (http://www.hkeconomy.gov.hk/en/reports/index.htm). 1 CBRE Data Prepared for Pershing Square.
66
69
HKD Weakness
Strong-side Intervention
________________________________________________
Source: Bloomberg.
70
Strong-side Intervention
________________________________________________
71
Source: Monthly Statistical Bulletin - Table 1.1 - Hong Kong Monetary Authority, September 5, 2011 (http://www.info.gov.hk/hkma/eng/statistics/msb/index.htm).
________________________________________________
72
The HKDs widely recognized undervaluation increases the likelihood that the HKMA will need to print more money to keep the HKD within the band With short-term interest rates already near zero, rates cant fall any further to discourage investors from holding the HKD
74
________________________________________________
75
Source: Bloomberg.
+10% real interest rates post the Asian Financial crisis retarded Hong Kongs recovery
High negative real interest rates have contributed Hong Kongs current and prior asset bubbles
________________________________________________
Source: Bloomberg. 76 Monthly Report on the Consumer Price Index - Census and Statistics Department, Hong Kong SAR Government, Underlying Inflation.
77
HKD Weakness
________________________________________________
Source: Nominal Effective Exchange Rate Bloomberg. External Trade - Census and Statistics Department, Hong Kong SAR Government, Table 76.
78
________________________________________________
79
Source: Half - Yearly Economic Report - Hong Kong SAR Government, p.111 (http://www.hkeconomy.gov.hk/en/pdf/er_11q2.pdf).
HKD Weakness
________________________________________________
80
Source: Bloomberg.
HKD Weakness
________________________________________________
Source: Bloomberg. 81 Monthly Report on the Consumer Price Index - Census and Statistics Department, Hong Kong SAR Government, Underlying Inflation .
Near zero US short-term interest rates for two years or more Despite high inflation, the HKD is still undervalued by ~30% HKDs undervaluation will only worsen as the RMB appreciates Broad money supply (M2) has not yet grown to reflect the full impact of the massive 2008/2009 Monetary Base expansion Undervaluation increases the risk that the HKMA will need to print more HKD to keep the currency within the band The HKMA estimates that HK has no spare resource capacity to absorb further demand growth
________________________________________________
82
Source: Half - Yearly Monetary and Financial Stability Report - Hong Kong Monetary Authority, March 2010, p.33.
Countries were measured across six different economic indicators of overheating Inflation GDP Growth Employment Credit Interest Current Account
________________________________________________
83
The Elderly
Value of their savings is eroded by inflation Low interest rates reduce fixed income investment returns
The Poor
Do not have the savings to absorb price shocks
The Rich
While some rich get richer speculating on real estate with lowcost credit, their global purchasing power deteriorates
85
________________________________________________
86
Source: Pictures - Zoe Li, William McCallum, Christopher DeWolf (http://jmsc.hku.hk/hkstories/content/view/659/8786/) and (http://www.lcscapes.com/HK-VerticalHousing/LC-HK_VerticalHousing.html).
40.0
35.0
30.0
25.0
20.0
________________________________________________
Source: Human Development Report 2009 - United Nation Development Programme, p.195 (http://hdr.undp.org/en/contacts/about/undp/).
Japan
Norway
Czech Republic
Germany
France
More Inequality
87
Switzerland
Australia
United Kingdom
Italy
New Zealand
United States
Hong Kong
________________________________________________
Source: Real Wages - Bloomberg. Census and Statistics Department Hong Kong SAR Government, Productivity Index, table 103.
88
12 10 8 6 4 2 0 Vancouver Hong Kong San Francisco San Diego Honolulu New York Los Angeles Montreal Sydney Toronto London
________________________________________________
Source: 7th Annual Demographic International Housing Affordability Survey: 2011 - Performance Urban Planning, p.10.
89
________________________________________________
90
Source: 15% Rental Increase Makes Singapore 5th Most Expensive Locations Globally - ECA International (http://www.eca-international.com/news/press_releases/show_press_release?ArticleID=7309).
A high-level Beijing official has expressed concern that the housing situation may become politically destabilizing:
Housing is of course a social and an economic issue. However, if dealt with inappropriately, it will also become a political issue.
-Wang Guangya Director of Hong Kong and Macau Affairs Office of the State Council of the Peoples Republic of China
________________________________________________
91
Source: Wang Guangya Talking About Housing Market When Visiting HK: Housing Issues May Become a Political Issue if Inappropriately Deal With June 15, 2011 (translation).
Tens of thousands of people are not satisfied with the level of political freedom in Hong Kong on July 1st, 2010
10,000 people protested against inflation (prices of food and housing) in March 2011
Several organizations protested against the dominance of property developers and high prices in May 2011
________________________________________________
Source: Picture - BBC (http://www.bbc.co.uk/news/10480116). Picture - The Economist (http://www.economist.com/blogs/banyan/2011/03/protests_hong_kong). 92 Picture - Macau Daily Times (http://www.macaudailytimes.com.mo/china/25180-residents-protest-high-property-prices.html).
MoreSocial Unrest
This year, 218,000 people, the most since the massive 2003 civil liberty protests, marched in Hong Kong's annual July 1st rally
They arent happy with the fact that they do not see an improvement in living standards, despite the good economic statistics. Bloomberg July 1st , 2011
________________________________________________
93
Unpopular Government
Despite a surging economy and 3.4% unemployment, the Chief Executive of Hong Kong has a lower approval rating than President Obama
% Who Would Vote Yes for the Current Chief Executive? Trade-Weighted Nominal HKD
94
Recent Headlines Hong Kong Faces Heat on Dollar Peg Financial Times, November 2010 Hong Kong Should End Peg to U.S. Dollar, Deutsche Bank Says Bloomberg, November 2010 The Peg will be History The Standard, January 2010
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95
A link to a basket of currencies or no link at all is more desirable Marc Faber March 2011 Continuous appreciation of the Renminbi means diminishing purchasing power of the Hong Kong dollarThe problem cannot be tackled unless we abolish the linked rate in Hong Kong. The Honourable Chan Kin-Por, Legislative Council Member & Chief Executive of Munich Re Hong Kong January 2011 I think its a case of a frog boiling in waterIt could happen sooner than people think given the rapid rise in circulation of the currency [RMB] Peter Redward, Barclays Economist October 2010 The merits of reform are high and the cost of the relevant option is low.4 James Grant May 2011
Politician
Economist
Analyst
Source: Its time to end the HK$ peg - Hong Kong Business, March 10, 2011. Legislative Council Transcript of January 6, 2011 meeting. 96 Hong Kong May have to revalue in 2 years, Barclays says - Bloomberg Businessweek, October 26, 2010. 4 Grants Interest Rate Observer, May 2011.
Housing Efforts have failed to reduce prices meaningfully LTV caps on new mortgages Transaction tax on homes sold soon after purchase Home Supply Increased land sales Introduction of a Minimum Wage Rent Relief Utility Subsidy Cash Handouts
________________________________________________
Source: Bloomberg. Hong Kong Property Morgan Stanley, September 2, 2011, p.19. Asian Economics Analyst Goldman Sachs, June 23, 2011, p.4.
98
Reminder
The history demonstrates that Hong Kong has modified its exchange rate system to address major economic changes
HKD/USD (inverted)
Sterling Peg
Free Floating
Dollar Peg
HKD Strength
________________________________________________
Source: Hong Kongs Linked Exchange Rate System Hong Kong Monetary Authority, p.34 (http://www.info.gov.hk/hkma/eng/public/hkmalin/index.htm).
The only effective way to mitigate inflation and a potential real estate bubble is to allow the HKD to appreciate
101
There are Four Principal Revaluation Alternatives 1. Allow the HKD to float 2. Repeg the HKD to a trade-weighted basket 3. Repeg the HKD to the RMB 4. Keep the USD peg, but revalue to an appropriate exchange rate
103
Alternative Two Peg to a Trade-Weighted Basket Pros: Monetary policy would more closely match that of its trading partners Reduces HKs real exchange rate volatility Singapore has successfully used this approach Cons: A basket is less transparent and more complicated than the Peg The average interest rates of HKs trade partners is low today, which would mean continued low HK rates A basket introduces more discretion as trade weights can be adjusted and are subjective, increasing the risk of politicizing monetary policy
104
Alt. Three A Direct or Basket RMB Link is Inevitable HKs deepening economic ties with the Mainland make a direct or basket RMB link the widely understood best long-term solution to solving the pressures of the USD link While the HKMA has said that it does not support an RMB link now, it has laid out preconditions, which we believe will likely be met in the coming years The biggest impediment to an RMB peg today is the lack of capital account convertibility of the RMB But we believe full capital account convertibility is inevitable and coming soon
The RMB is rapidly internationalizing in the current account and full convertibility is possible by 2015: I should say it is quite possible for China to realise yuan convertibility by 2015.
Li Daokui, Peoples Bank of China (PBOC) Monetary Policy Committee, September 2011
________________________________________________
Source: Yuan Will Be Fully Convertible by 2015, Chinese Officials Tell EU Chamber Bloomberg, September 8, 2011 (http://www.bloomberg.com/news/2011-09-08/yuan-to-be-fully-convertible-by-2015-eu-chamber.html). China Yuan Likely Convertible by 2015 Thompson Reuters September 9, 2011. 106
The extremely divergent economic characteristics of HK and the US make the status quo unsustainable, destructive, and a distortion to the HK economy
The HKD will likely be pegged to the RMB or to an RMB-led basket within the coming years. All that is needed is an interim solution
107
We believe the HK government will repeg the HKD at a stronger exchange rate to the USD while leaving the LERS intact
Contemporaneous with this revaluation, we believe the HKMA may indicate that the HKD will eventually be pegged to the RMB or to an RMB-led basket when the RMB is fully convertible
108
Why Does This Make Sense? The current LERS is simple, transparent, and credible so a continuation of the current system makes sense A revaluation can be achieved quickly Only an interim solution is needed because the RMB will be convertible in coming years No other interim change will be necessary
110
Considerations
The exchange rate should be adjusted sufficiently to quell speculation about further appreciation But not so much that the currency would become overvalued A wider trading band could be introduced to provide greater flexibility in a volatile world
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Source: Half-yearly Hong Kong Economic Report 2011 Hong Kong SAR Government, p. 97. Foreign Currency Position and Asset Quality of Retail Banks Hong Kong Monetary Authority (http://www.info.gov.hk/hkma/eng/statistics/msb/index.htm).
V. Investment Opportunity
Three Ways to Make Money Buy HKD Outright Buy HKD with USD Leverage Buy HKD Call Options
Buy HKD Outright The HKMAs commitment to support HKD at 7.85 HKD/USD limits the downside to owning HKD to ~1%, making the HKD effectively a one-way bet The HKMAs 7.85 HKD/USD defense is credible: The HKD is materially undervalued HK has substantial international reserves, at ~2.2x the Monetary Base The HKMAs successful defense of the HKD during the Asian Financial Crisis makes its credibility unquestioned
12 Month Financing Cost (Fixed) HIBOR 0.67% LIBOR 0.82% Carry -0.15%
117
Reflects the cost of financing for a bank. Institutional and individual investors will pay a higher rate (~35bps more)
OptionTerms
Notional Strike (HKD/USD rate) Premium (% of notional) Premium Dollars (USD) $ 1,000,000,000 $ 7.80 0.83% 1,000,000,000 $ 7.50 0.57% 1,000,000,000 7.00 0.27%
PayoutsatExercise(Revaluationto6.00,+30%)
USD Received USD Spent (notional) $ 1,300,000,000 1,000,000,000 $ 1,250,000,000 1,000,000,000 $ 1,166,666,667 1,000,000,000
Payoff Payoff/Premium
USD received = value of HKD purchased at strike price converted back at spot (6.00)
________________________________________________
118
% Revaluation
119
The Market is Mispricing this Option Because of the peg, HKD/USD volatility is very low We believe HKD call options should be priced based on expected value rather than volatility
Expected Value = (Probability of Reval) X (Expected Amount of Reval)
We think a revaluation is more likely than not, but the market price implies extremely low probabilities
One Year, 7.50 Strike Expected HKD Stregthening 15% 20% 25% 30% 35% 40% Implied Probability of Revaluation 5.3% 3.7% 2.8% 2.3% 1.9% 1.6%
121
Source: Foreign Currency Position and Mortgage Survey Results Hong Kong Monetary Authority (http://www.info.gov.hk/hkma/eng/statistics/msb/index.htm).
________________________________________________
Source: Previewing the Political Year Ahead: Article 23 Suzanne Pepper (http://chinaelectionsblog.net/hkfocus/?p=168).
The conventional wisdom is that central banks (CBs) can defend the strong side of their currency without limit by simply printing an unlimited amount of money The reality is different: The CB loses money on a revaluation, because a revaluation reduces the value of foreign assets on their balance sheet Printing money expands and leverages the CBs balance sheet, making it more costly to revalue Printing money is highly inflationary Because the Basic Law requires the HKMA to back its Monetary Base 100% with international reserves, printing money could severely limit the HKMAs future revaluation options
Revaluing Now Mitigates Financial Risk to the HKMA The HKMAs 2008/2009 intervention, in response to over HKD $600bn of money flows, greatly increased the size and leverage of its balance sheet
Pre-Intervention Post-Intervention
Leverage: 75%
Leverage: 56%
Source: Monthly Statistical Bulletin Table 8.2 Hong Kong Monetary Authority, July 2011 (http://www.info.gov.hk/hkma/eng/statistics/msb/index.htm).
127
The principal argument against a revaluation is that it might harm the HKMAs credibility. We believe this is false for two reasons: 1) Reducing inflation and the risk of asset bubbles in HK enhances HKs status as a stable, economically successful, AAA rated region 2) Allowing the HKD to appreciate only increases the credibility of the HKD as a store of value
128
Some observers have suggested a revaluation would be inconsistent with the HKMAs public statements
129
However, an upward revaluation was explicitly contemplated in 1983 when the LERS was introduced: It will be acceptable to indicate eventual possible appreciation in the event of confidence returning to such a degree as to produce unduly rapid monetary expansion, but such an indication must carry complete conviction that the rate would only ever be adjusted in that direction.
- Internal Hong Kong government policy memo, 1983
________________________________________________
130
A peg depends on confidence and credibility. Any hint of devaluation would compromise the integrity of the link: Any statement which can be interpreted as hinting at the possibility of depreciating the announced rate would sabotage the scheme from the onset.
- Hong Kong government policy memo, 1983
________________________________________________
131
As such, anytime observers have questioned the link, the HKMA has issued a prompt statement to quell speculation
"The Hong Kong dollar peg has been working well since its adoption in 1983. It's the foundation for the stability of the currency and financial system in Hong Kong so we have no intention to make any change"
Norman Chan, HKMA Chief August 2011
________________________________________________
132
Sources: Linked Exchange Rate System Hong Kong Monetary Authority, August 2011 (http://www.info.gov.hk/hkma/eng/insight/20110815e.htm).
In 2002, facing SARS, deflation, and budget deficits the then Financial Secretary strongly defended the peg publically:
We have no plans to change the peg. One of the reasons the peg remains and people are confident about the Hong Kong dollar is that it has not changed in the last 19 years
Antony Leung, Financial Secretary (2001-2003) Nov. 2002
________________________________________________
133
Source: Financial Secretary Transcript - Press Release, November 23, 2002 (http://www.info.gov.hk/gia/general/200211/23/1123063.htm).
The chief executive, Joseph Yam, and I did seriously evaluate the various options including unpegging
Antony Leung, Financial Secretary (2001-2003) Interview Hong Kongs Peg Admission May Hurt its Future Defense Bloomberg, June 2007
________________________________________________
134
Sources: Hong Kong's Peg Admission May Hurt Its Future Defense Bloomberg, June 8, 2007 (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akb5SpAzhFKg&refer=asia).
We also know from a document WikiLeaks released August 30th, 2011 that in 2006 a float was seriously considered by members of an important HK government commission:
Numerous commission [HKs Commission on Strategic Development One of the HK governments most prominent] members who, in Fungs words, have the ear of senior officials are arguing that the HKD-USD peg should be floated shortly after the Chinese RMB surpasses the HKD in value.
Internal US Treasury Memo, Hong Kong Dollar Pegs Future Under Consideration by Government Advisory Body April 2006
________________________________________________
135
A prominent member of the HKMA committee responsible for advising on the peg suggests a revaluation could happen when the market least expects:
[T]he HKMA might choose a hot and boring Friday afternoon in mid-summer, when most fund managers and top government officials had gone vacationing, and announce the floating of the Hong Kong dollar.
-Shu-ki Tsang Academic Economist and HKMA Advisory Board Member, Currency Board Sub-Committee
________________________________________________
136
Source: Commitment to Exit Strategies from a CBA Hong Kong Baptist University (http://sktsang.computancy.com/attrachment/Tsang20000506.pdf).
We have every reason to believe HK decision makers will approach the HKD peg question with the same diligence and rationality they have used in the past
137
Unlike some other currency regimes, HKs peg can be modified through a purely administrative process. No legislative action is required
139
In Sum:
+
A highly undervalued option
Q&A