Hong Kong In-Depth Research Report Series-Timing When Speculating on De-Pegging and Other Trading Opportunities

Abstract

This is the second in-depth report which discusses the possibility that the Kong Kong Dollar (HKD) will cease to be determined by the currency board system. In the previous report, the author discussed the unsustainability of pegging the HKD to the USD when the Chinese economy is deteriorating and the Fed is increasing interest rates. The first report proposed a de-pegging in the near future in order to mitigate costs while the HKD is still strong in view of capital inflows from the mainland. Such a decision could lead to a win-win situation for both the Hong Kong (HK) government and investors. However, governments frequently lack the capacity to choose the best options. Therefore, the HK government is likely to maintain the current system, even at a high social and economic cost, in the expectation that the environment will change and relieve it from pressure. This could happen, for example, if the Chinese economy rebounded. Considering that the HK government owns huge amounts of foreign reserves, it is not easy for investors to pick the best time to speculate on a de-pegging of the HKD. An HKD crisis might come about following a collapse of the housing bubble in mainland China. This report covers several methods which can be adopted to gauge the risks associated with a de-pegging of the HKD and a collapse of Chinese housing bubble. It is believed that the crisis will eventually come, whether the HKD is de-pegged or not, and there will be huge trading/arbitrage opportunities. In this regard, careful research and review of the HK government’s massive intervention during 1997 is insightful. At the same time, identifying the impact of a de-pegging on Hong Kong’s local companies and determining the most vulnerable parts of the system can increase investors’ chances of success. The recent development of the Hong Kong bond market might provide a good goal.