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Banking & finance
OpinionComment
Neal Kimberley
Neal Kimberley

Macroscope | Hong Kong dollar peg’s strength shines through in Ackman hedging short play

  • High-profile investors’ long record of failed attempts to break the Hong Kong dollar peg speaks to the strength of the architecture underpinning the scheme
  • Speculators might believe it is no longer fit for purpose, but their efforts are in vain unless they can outspend and outlast the HKMA

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The Hong Kong dollar’s peg to the US dollar has come under pressure from international investors yet again, a strategy that has yet to succeed given the currency’s robust support at home. Photo: Shutterstock
Neal Kimberley
“If you bet against the Hong Kong dollar, you are bound to lose,” Financial Secretary Paul Chan Mo-po said on November 3. US billionaire Bill Ackman, founder of hedge fund Pershing Square Capital Management, begs to differ.
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“We have a large notional short position against the Hong Kong dollar through the ownership of put options,” Ackman wrote on Twitter on November 24. “The peg no longer makes sense for Hong Kong and it is only a matter of time before it breaks.”

Ackman is not the first distinguished investor to take aim at the Hong Kong dollar. Hayman Capital Management’s Kyle Bass held a similar view for a few years. In 1998, during the Asian financial crisis, legendary investor George Soros also made an unsuccessful attempt to break the Hong Kong dollar peg.

But no one has yet succeeded in this regard. This lack of success arguably derives from a failure to grasp how robust the architecture that underpins Hong Kong’s currency arrangement, the linked exchange rate system (LERS), is.

The mechanics of the LERS require the Hong Kong Monetary Authority (HKMA) to ensure the Hong Kong dollar trades within a convertibility zone of HK$7.75 to HK$7.85 versus the US dollar. If either side of the convertibility zone is threatened, the HKMA acts to prevent a break of the range.

But the LERS is not just a peg. It’s more complicated than that. Hong Kong hasn’t just said that HK$7.75 to HK$7.85 is the range within which the Hong Kong dollar will trade versus the US dollar and that the HKMA will take on anyone who seeks to break it out of that convertibility zone. Hong Kong has also consciously decided its own monetary policy will mirror that of the United States.

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