July 23, 2025 • 26 mins
Investors are once again questioning the sustainability of Hong Kong's foreign exchange regime. Critics argue the Hong Kong currency's peg to the dollar, dating to 1983, no longer makes sense as the city's links with China strengthen. Authorities have already intervened at least five times this year to defend the Hong Kong dollar, spending over $11 billion.
Does a peg linking the Hong Kong dollar to the Chinese yuan, or a basket of currencies, make more sense? Could hedge funds attack the currency? Investors like George Soros and Bill Ackman have tried, and failed, to break Hong Kong's dollar peg. How many more times will the government need to intervene? Carlos Casanova, senior economist for Asia at Union Bancaire Privée, breaks down Hong Kong's currency regime and what's ahead. He joins John Lee and Katia Dmitrieva on the Asia Centric podcast.
Related news: https://www.bloomberg.com/news/articles/2025-07-15/hong-kong-defends-fx-peg-for-a-fifth-time-as-pressure-extends
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Speaker 1 (00:01):
Hong Kong officials have intervened to support the currency five
times in about three weeks to prevent the Hong Kong
dollar from weakening too much. So far, it cost nearly
ninety billion Hong Kong dollars. That's the equivalent of about
eleven billion US.
Speaker 2 (00:17):
Just two months ago. The opposite was true, with the
Hong Kong Monetary Authority or HKMA having to pump money
into the system to keep it from strengthening too much.
Never before has the Hong Kong dollar been so volatile,
and it's a tough balance for officials who need to
drain enough cash from banks to defend the currency, but
not so much that the economy or markets get hit.
Speaker 1 (00:41):
You were listening to Asia Centric from Bloomberg Intelligence. I'm
Krtydmitriva in Hong Kong.
Speaker 2 (00:46):
I'm John League, also in Hong Kong, and today.
Speaker 1 (00:49):
We're diving into all things Hong Kong currency, why the
government is intervening, how we got here, and maybe even
some more existential questions of why we even have a
US PEG. And to walk us through all of this
is Carlos Casanova, Senior Economists for Asia at Union Bonker
preve Welcome to the show, Carlos.
Speaker 3 (01:08):
Thanks for having me and I'm really glad to join
you today.
Speaker 1 (01:11):
Yeah, and it's a really interesting topic. It is suddenly
Hong Kong dollar is hot again. I guess maybe just
starting from the beginning, can you break down why the
government had to step in, Like, how did we get here?
Speaker 3 (01:24):
Well, it has been a roller coaster of three to
five weeks. We've not seen this level of volatility, I
think in a long time, or if at all, since
the establishment of the PEG. Obviously, following the announcement on
reciprocal tariffs by Trump in April, the region as a
whole experienced a lot of EFCS volatility and we saw
broad ust dollar weakening. Hong Kong was not alone. We
(01:46):
saw a lot of speculation around Taiwan, Korea and other
carrier currencies, but Hong Kong experienced very aggressive volatility as
a result, so it touched briefly the strong end of
the band at seven point seventy five, prompted the Hong
Kong Monetary Authority the HKMA, to intervene by buying seventeen
billion US dollars and selling one hundred and twenty nine
(02:07):
point four billion Hong Kong dollars. So the result of
that operation is a massive search in the aggregate balance,
which is an indicator of interbank liquidity, that surged to
around one hundred and seventy four billion Hong Kong dollars
on May sixth, and that's up from just forty four billion,
which had been the norm for quite a few years
prior to this big intervention. Now, that large spike in
(02:31):
interbank liquidity fueled the widening of the three month high
bore software spread, meaning the interest rates spread between Hong
Kong and the rest of the world widened to and
unprecedented two hundred and sixty basis points. And of course,
whenever that happens, you see a lot of carry trade
and demand for honkon dolla, and a lot of speculation
around what that's going to happen. Following that decline in
interbank rates, the spot currency moved so within the span
(02:53):
of a few days it went from the strong end
of the band all the way towards seven point eight three,
which is towards the weekend of the band, and the
twelve month forward outright also rebounded from seven point sixty
eight to seven point a five essentially meaning that the
market was expecting that the Hong Kong dollar, which remained
on the weaker end of the band, for the foreseeable future,
at least the whole year. So what happens when we
(03:16):
hit the seven point eighty five, which we have five
times over the past three weeks, is that the Hong
Kong Monitory Authority to intervene to defend the currency. So
it's bought a total of seventy two billion Hong Kong dollars,
sold a total of nine point two billion US dollars
since June twenty six, and as a result, we've seen
a declining in the aggregate balance to eighty six billion,
which is still double the amount of the forty four
(03:39):
billion prior to Liberation Day. So we are still in
a very liquid situation, but we've seen a lot of
action by the Hong Kong may So if I could.
Speaker 2 (03:44):
Put that in layman's terms, in April, you're saying that
the Hong Kong dollar was too strong versus the US dollar,
and then recently it was two week so the HKMA
had to intervene correct.
Speaker 3 (03:56):
So we saw huge US dollar weekending in April, causing
a lot of strengthening in Asian currencies, Hong Kong Doola
touched the strong end of the band, prompting a massive intervention,
and that caused a huge search in the spread. Of course,
fundamentals typically moved currencies. So because of the very specific
EFS regime that we have in Hong Kong, the Hong
Kong Dola weekend all the way to the weekend of
(04:18):
the band within the span of a few days.
Speaker 1 (04:20):
Now, I know we had asked you to take a
step back and explain all this, which is great. If
we could take another big step back and just talk
about why we have this peg to begin with, Why
is Hong Kong's currency so unique in the region. Why
do we have the peg which kind of leads us
into these tricky situations.
Speaker 3 (04:37):
Yes, so to cover this question, I have to be
the economist in the room, and I have to refer
refer back to an economic axiom called the impossible trinity.
So in Hong Kong we have a fixed exchange rate
and we have free capital flows of course no capital controls.
As a result, we do not have any independent monetary policy. Instead,
(04:57):
the Hong Kong may relies on the interest rates to
by the Fed, So when the Fed hikes interest rates,
the Hong Kong May has to do the same. When
they cut interest rates, the Hong Kong May has to
do the same. This is also called linked exchange rate
system LRS LARS, and it was previously I think that's
a very sort of technical term. It was previously known
currency board. So we've seen examples of currency boards in
(05:19):
Latin America. They were not very orthodox, very strict, so
they didn't succeed. Hong Kong is usually the post a
child for what a currency board should be, and it
was introduced in the eighties to try to address some
of the issues around hot money flows. It was very
volatile prior to that. We are a small export oriented
or externally oriented economy. So of course the currency board
does provide stability, but it comes with its costs. And
(05:43):
there are three principles that are enshrined in the Hong
Kong Constitution, the Basic Law and that are unmovable. So
this is something that oftentimes when we talk with international
investors they don't understand to what extent this is part
of the law of the region. And these are that
any change in the monetary base must be matched by
an equivalent change in foreign exchange reserves, ensuring that FX
(06:03):
reserves cover at least one hundred percent of the monetary base,
and Hong Kong is very good, so we have one
hundred and fifty percent plus FX reserves, so very very
orthodox in that front. The currency must be fully convertible
on demand into a foreign anchor currency in this case
the US dollar, and at a fixed rate, so we
have seven eighty with the MA allowing some volatility around
(06:24):
this band of seven eight five to seven seveny five.
And lastly, monetary policy should be rule bound and automatic,
so the HKMA has no discretionary monetary power to engage
in fiduciary issuing of money, so they have no say over,
you know, whether they want to stimulate the economy with
monetary policy, if interbank raade should be high or low,
they have no say over that. And there are ways
(06:44):
to test the orthodoxy of a currency board through the
reserve exchange pass through and we've done some research recently
that proves that this pass through rate remains within zero
two one hundred percent, so meeting the criteria of an
orthodox currency board. So the aim of the currency board
is to reduce exposure to effects, volatility provides stability to
(07:05):
the region, and in exchange, you have no monetary policy
and you have to adhere to these very strict principles,
which Hong Kong does, and there are some costs that
of course.
Speaker 1 (07:14):
Yeah, and I wonder one of the things, you know,
because you've lived here for about twelve years, right, so
over that period of time, how many times do you
think you've heard this idea that we should unpeg or
Hong Kong should unpeg from the US dollar.
Speaker 3 (07:28):
I have written about this many times over the past
few years. The last time I did a big write
up on the Hong Kong DOLLA was in twenty sixteen,
and at the time I was fortunate enough to reach
out to some of the top academic experts on currency boards,
so Steve Hanke, Johns Hopkins, for example, comes up. And
I was also able to reach out to some of
(07:49):
the Hong Kong Monetary authority officials as part of that research,
just to kind of get a sense of how strong
the political will to support the currency was. So it's
a topic that does come up on occasion, and I
think the reason why it comes up on occasion is
because there's a lot of interest from particularly hedge fund managers,
especially in the US. The reason for this is that
(08:11):
the basic law does not dictate that the Hong Kong
dollars de facto anchor currency is a US dollar, and
neither does it specify a level at which the Hong
Kong dollars should be pegged against the foreign anchor currency,
So that loophole quote unquote continues to serve as the
basis for speculation that breakage could occur. And of course
it's a tail risk. It's a fringe risk, but if
you're a hedge fund manager, you can afford the losses
and if you get it right, you make a lot
(08:32):
of money. So every sort of five to ten years
you get a fresh bout of someone putting, you know,
options and trying to make money out of this possibility.
But we think it's rather unlikely to be frank, So
this is.
Speaker 1 (08:44):
Not a visual podcast. But as soon as you said
hedge funds, John and I looked at each other and
started nodding, made eye contact, started nodding at each other
because we were just talking about this before the show.
Speaker 2 (08:54):
Yeah, like, I think it's it's in hedge fund law.
But you know, George Soros famously broke the Bank of
England I think in nineteen ninety two by forcing the
UK government to withdraw from the European exchange rate mechanism. Interestingly,
Scott Bessont was working for George Soros at that time.
George Soros also tried to break a Hong Kong dollar
(09:15):
peg I think during the Asian financial crisis in nineteen
ninety eight. Do you think this could happen again?
Speaker 3 (09:21):
So we have George Soros, we have Bill Ackman. So
there's a series of very big hedge fund guys who
are also advisors to the Trump administration that have in
the past at least put bets that the Hong Kong
dollar peg would break. I think it reflects their inability
to fully grasp the academic nature of what a currency
(09:44):
board is and what it does. So it's very easy
to look back at historical examples in Latin America and
why that didn't work, or refer back to George Soros
in the eighties speculating against the Bank of England or
even Thailand with the Asian financial crisis. Of course, he
made vast amounts of money with those bets, and to
try to extrapolate the situation on Hong Kong. But the
truth is, Hong Kong has to peg to a currency
(10:05):
that is fully convertible according to the Basic law, and
it has been adhering strictly to the rules that are
enshrined in its Basic law in terms of maintaining currency
board orthodoxy. The Remenbe is not a good candidate for
the Hong Kong DOLLA to repeg against because the Remenbe
is not fully convertible. So what these hedge for managers
have been betting on is that the Hong Kong government,
(10:27):
for political reasons or what have you, will repeg away
from US dollar and towards the Remenbe, and that is
simply not possible under the current legal framework in Hong Kong.
Now there is an argument to be made about whether
or not the peg is serving us. It used to
be the case that Hong Kong's economy was very correlated
with the global business cycle, especially prior to the two thousands,
(10:50):
when China wasn't such a dominant force in the global
economy and global trade. Since then, the Hong Kong business
cycle and the Chinese business cycle have become increasingly correlated,
and we have become increasingly a service provider for Chinese
companies going overseas, and naturally that means that the PEG
sometimes acts as a pro cyclical headwind. By that, I
mean when things are going south, it makes things even worse.
(11:13):
So it's a pro cyclical the cycle is down and
it makes things worse because typically when it happens, the
FED is also hiking interest rates, as we have seen
over the past few years. So there is a case
to be made at some point eventually it will be
necessary to change the board. Now, the Hong Kong may
has done a lot of academic research evaluating whether or
not the PEG brings prosperity to the region, and the
(11:33):
long term view is that it does. The stability provided
by the PEG does bring prosperity. It comes at the
cost of these periods where you have a cyclical downturn
and the PEG exacerbates those pressures. Typically the government is
able to use fiscal to offset some of that pressure.
What has happened is in the past couple of years
post COVID, we now have a deficit which we are
not allowed to have according to the constitution as well,
(11:54):
and so they have less room to do fiscal to
try to offset this. So if this situation of a
strong US dollar continues, which may or may not be
the case, we can get into that in a minute.
But then, yes, the fiscal wouldn't be enough to upset this,
so Hong Kong would be in a very stackflationary outcome
for a long time, and possibly at that point they
could consider moving into something different. In my opinion, it
(12:14):
won't be a repeg, It will be a completely different
EFTs regime based on a basket of currency, similar to
what we see in Singapore. That could happen, but I
don't think the betting on a repag to the remybe
is going to make anybody any money anytime soon.
Speaker 1 (12:27):
What would that look like? You just said if we
don't have a world where the pegged to the RENMNB
makes sense, and you just mentioned that it could be
pegged to a basket of currencies. Could you explain that
a bit more, what that could look like.
Speaker 3 (12:38):
Yes, So what we have in Singapore is a very
similar situation where they have the need to mitigate the
impact of EFX volatility on their system, but instead of
pegging strictly against one currency, they manage the Singapore dollar
against a basket of currencies, and as we are moving
towards a bifurcated world, that would make sense so for
(13:00):
China to broaden the basket of currencies that it uses
in its own management of its its own currency away
from US dollar towards other regional partners. So Hong Kong
could adopt a similar mechanism, and in that case they
would no longer be subject to the FED, so they
wouldn't have to cut or hike interest rates in tandem
with the FED, but they could manage monetary policy easing
(13:22):
and tightening by addressing the slope or the pace at
which they allow the currency to appreciate in trade weighted
terms against their partners. So typically that's what Singapore does.
Hong Kong could study and doing something similar, but it
would require a change in the basic law and that
is not something that you do lightly.
Speaker 2 (13:43):
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(14:06):
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Speaker 3 (14:11):
Calos.
Speaker 2 (14:12):
Can you make the argument that this exchange rate mechanism
didn't serve Hong Kong world after COVID, because you know,
the US dollar was very strong, the US economy was
very strong versus the rest of the world, the US
height interest rates at the same time Hong Kong economically
was suffering. We had a strong currency, we also had
(14:32):
high interest rates, and that really impacted the retail segment
in Hong Kong.
Speaker 3 (14:37):
I think you make a very valid point. It's not
just Hong Kong. We are exiting a world of zero
interest rates, and we are entering a world of higher
for longer with both higher rates in the US, structurally
higher inflation globally, and also higher tariffs. So US consumers
(14:57):
are now facing eighteen percent tariffs that's unheard of since
the nineteen thirty So we are entering and charted territory
in a world where the dollar is structurally stronger and
rates structurally higher than Yeah, Hong Kong faces significant stackflationary risks.
Meaning lower growth and deflation. And keep in mind that
we are importing a lot of deflation from China, perhaps
(15:17):
more so than any other economy, so that would be
a risk for Hong Kong. Where this changes, however, is
if we enter a world of US dollar weakness. So
if the US dollar you know what triggered this big
surge in interbank liquidity. It was the announcement of reciprocal
tariffs in April. It was investors being concerned that a
(15:37):
lack of visibility on US trade policy and to some extent,
domestic policy was eroding US exceptionalism and some of the
rights that come with that, including US dollar strengthening since COVID. Essentially,
so if we move away from a world where the
US dollar strengthens structurally and you have upside on US equities,
if we move to a world where US total equity
(15:58):
returns are flat because you have currency weakness, then it
doesn't put pressure on the Hong Kong economy to the
same extent. So we do think that the FED will
start to cut interest rates towards the fourth quarter of
this year, Hong Kong may will do the same, and
then we are also expecting red cuts in twenty twenty six.
So my guess is that the debate is going to
phase out and fickle out over the coming months and
(16:21):
it won't be such an important point on the policy age,
and then you won't have US hedgeman managers making any
bets against the Hong Kong DOLLA until conditions reverse. So
potentially if we enter another phase of like two to
three years of US dollar strengthening, then it will become
another topic before the time being. I think it is
just a matter of waiting.
Speaker 2 (16:39):
There's probably some hedge fund macro head fund managers that
could be listening to this podcast right now if they
do try to attack the Hong Kong dollar. Does the
HKMA have enough funds to defend the currency?
Speaker 3 (16:51):
They have a lot. So, Hong Kong May has a
lot of EFX reserves. As I mentioned, the law requires
us to have one hundred and fifty percent of the
monetary base one hundred percent. We have over that, we
have one hundred and fifty something percent. I believe Hong
Kong May has made very public remarks in recent weeks
that they are committed to defend a PEG, and you
have to understand the role that accessing US dollar markets
(17:16):
place for China. So until China is able to fully
liberalize its capital accounts, which is perhaps a topic of
another podcast. I mean, if they do, then at that
point it might make sense to repag against them inb
because it would be fully convertible. But the conditions for
them to be able to achieve that will you know,
it will take me with ten or twenty years. So
(17:37):
during that period they will still require an offshore center
in order to facilitate their technological upgrade and enable that
some of these up and coming tech companies can raise
US dollar financing. So we are seeing a huge surge
in the IPO pipeline in Hong Kong because borrowing rates
are lower and US dollar is still a ruble reserve currency.
So I think even if we are in a situation
(17:58):
where that Hong Kong dollar remains on the weekend of
the band for so long, because the speculation by us
A trial managers is, you know, they're so committed to
this trade that they push the Hong Kong are made
to burn through all of its effects reserves. At that
point in China injects like they will not risk accessing
US dollar capital markets via Hong Kong in exchange for
some political you know, making a political statement about the
(18:20):
US dollar through a repeg to a currency that is
not fully convertible in itself. So unless they all agree,
I don't think any individual US actual manager has enough
cash at hand to burn to achieve this outcome. But theoretically,
if it was possible, I think the Chinese government would
intervene because of the important role that Hong Kong serves
as an offshore intermediary.
Speaker 1 (18:40):
So maybe George Sorrow. So if you're listening to our
podcast pro tip, so what's your best outlook? Then, Carlos,
for how many more times the government might have to
intervene from here? Is it sort of like until we
see that first cut from the Federal Reserve? What's your
what's your best outlook here?
Speaker 3 (19:02):
So I think that the Fed will start cutting by
the end of the year, So this situation should at
least last until the end of the year. The hybrid
rates are abnormally low, so the overnight rate I think
is just slightly above zero percent. The three month high bore,
which banks are now using to price mortgages is around
two percent, so we do expect that hybrid rates will
(19:22):
go up, but they will stabilize at levels that are
higher than or we had prior to the Liberation Day
tariffs because of a myriad of factors, including the fact
that you are having more easy in Man and China,
and the demand for credit in Hong Kong with the
situation in the housing sector just isn't very high. So
we do think that higher rates go up from here,
but they will stabilize at lower levels, and that is,
(19:45):
in my opinion, actually moderately stimulative for Hong Kong assets,
including both equities equities first and then even real estate.
So now with mortgage rates at two percent, yields at
three percent, there's a one percent positive carry, perhaps not
super enticing, but enough for a certain group of the
population to maybe dip their toes if it's the first
time buying a house, for example. So I think it
(20:07):
actually is a net positive for the Hong Kong economy,
and I think it's a positive that lasts until the
end of the year. Beyond that, really it's a matter
of how steep the FED cutting cycle is going to be.
They've been on a pause since December, and so if
they do four, it's definitely very good for Hong Kong.
We will have a week a dollar and then lower
(20:27):
rates overall. But if for whatever reason, inflation overshoots domestic
to private, domestic demand in the US remains robust and
the FED can't do as many cuts, then Hong Kong
will continue to be in a bit of a tight spot.
Speaker 2 (20:40):
Carlosa, Hong Kong's a new stable coin law will be
implemented on the first of August. Now, if this is
successful and there's stable coins backed by Hong Kong dollars,
and if this leads to increased demand for Hong Kong dollars,
how does this fit into what we've been discussing. Does
this help the Hong Kong Authority?
Speaker 3 (21:00):
Is if there's increased demand for Hong Kong dollar, which
we should see increased demand for hongkon dolla regardless because
of the free money that you can get from the
carry trade. If George Soros is listening, perhaps that is
a better idea than betting against the peg, and that's
what's going to sort of eventually mop up the ad
(21:20):
something excess billion in the aggregate base. So if you
have additional demand, because you know the IPO cycle is strong,
so you have demand for honknd doll because people want
to participate in that upside. And you also have this
hype around stable coin, and I don't think anyone understands
what the future of stable coin is and whether it's
going to fuel the dollarization trends or not, but it
(21:40):
is possible that at the very least people will want
to participate, and so it could fuel demand for hongkon dola.
In that case, you would of course see interbank liquidity
getting drained and you would see the interbank rates going up,
and that would mean that this moderately stimulative condition that
Hong Kong is enjoying right now would no longer be
in place. So it does actually make the life of
(22:02):
them a little bit more complicated. But if that's the case,
I think they might be okay with it because of
the potential long term gains of being an innovator or
a first mover in the stable coin and cryptocurrency space,
which seems like something that they tried to promote.
Speaker 1 (22:19):
You know, it struck me as we were talking earlier
about Trump and Trump's tariffs on Liberation Day and the
sort of back and forth that that's caused. I mean,
whiplash globally for everyone, But could potentially the Hong Kong
monetary authorities intervention also catch his eye for the wrong reasons.
In other words, you know, Trump has gone on about
(22:43):
the problem or the issue of countries intervening in their
own currencies, especially China, you know, China being top of
that list. So could this be perceived, you know, Hong
Kong authorities going in to defend the currency. Could it
be seen potentially as currency intervention and sort of catch
Trump's eye?
Speaker 3 (23:00):
I think so. Trump's administration has in the past made
remarks about countries that they perceive should be on the
currency manipulation list, and some of those remarks don't always
make economic sense. For example, when China was intervening to
prevent its currency from depreciating further, and they called China
a currency manipulator. Perhaps some of it Trump's advisors are
(23:23):
still thinking about the early thousands when China essentially kept
its currency undervalued to benefit from all of the upsides
from joining WTO and participating in the global system. But
more recently, what we have seen since the introduction of
the CFTs, the current FS regime in China in twenty fifteen,
(23:46):
is that the currency has structurally weakened about one point
three percent per year, and that's in line with structural
slowdown in the Chinese economy. So China is intervening to
prevent that from being even faster, So from preventing that
structural slowdown from taking place even faster, potentially resulting in
capital outflow pressures and exacerbating If you have a big
capital outflow, it will be very difficult for you to
(24:07):
restructure the domestic debt. So they're trying to focus on
that domestic debt restructuring before they allow any sort of
outflow or reform to the capital account front. But so
we have seen a ten year period of weakness with
the Chinese Central Bank intervening to prevent this from being
even more dramatic. And I think Trump's understanding of the
situation isn't one hundred percent correct, so it could get
(24:29):
his attention, but I think that even if it does,
it might be futile because they are a bigger fish
to fry. For example, what comes next to what are
the next ten years of the Roman bee? I think
that's probably a bigger policy question for the US. And
by the way, we have also looked at research on
FX regimes in China and they do seem to pivot
every ten years or so. So the time is ripe
(24:52):
for China to announce a NEWFX regime, and the world
is moving towards increased by furcation reduced trade dependency on
the US, So I think that is a bigger question
if China enters a phase where they allow the currency
to depreciate even further over the next ten years, but
in a controlled manner, so they don't have outflows, but
they reap the benefits from being able to preserve their
(25:12):
terms of trade and export high value added goods while
simultaneously restructuring their domestic debt. That's a bigger threat than
Hong Kong Dolla being very by the books and sort
of following the Currency Board orthodoxy and principles. I would
say it's more likely that he will be dissatisfied with
the pboc's inability to strike a deal on the currency front.
(25:33):
So this is one of the things they're talking with
Korea and with Japan. China has been obsessed with the
Plaza chord for the longest time. They have studied the
Japanese last decades, and if you look at the discourse
amongst domestic economists in China, it's perceived as a big mistake.
So the Plaza chord was a big mistake for Japan.
That's to be debated, but in Chinese policy circles they
(25:54):
consider that that was a trigger for the last decades.
So I don't think China is going to agree to
strengthening their currency against the US dollar. So I think
that whatever happens in Hong Kong could catch his eye,
but very soon he will focus on the situation in
China because it looks like they're going to allow the
currency to appreciate even more over the next ten years
as part of a new FX regime.
Speaker 1 (26:14):
Interesting stuff, fascinating discussion. We cover a lot of ground.
Speaker 3 (26:17):
Yeah, thanks, all very interesting topics and we are definitely
entering a pivotal moment, so it's a very crucial topic.
Speaker 1 (26:23):
Yeah, thank you so much for joining us. Thanks you've
been listening to Asia Centric from Bloomberg Intelligence and Katim
Trieva in Hong.
Speaker 2 (26:30):
Kong, and I'm John Lee also in Hong Kong. This
podcast was produced and edited by Clara Chen. You can
also listen to all our prior episodes on Apple podcasts,
Spotify or ever listen. Thanks for listening, See you next time.
Hong Kong officials have intervened to support the currency five
times in about three weeks to prevent the Hong Kong
dollar from weakening too much. So far, it cost nearly
ninety billion Hong Kong dollars. That's the equivalent of about
eleven billion US.
Speaker 2 (00:17):
Just two months ago. The opposite was true, with the
Hong Kong Monetary Authority or HKMA having to pump money
into the system to keep it from strengthening too much.
Never before has the Hong Kong dollar been so volatile,
and it's a tough balance for officials who need to
drain enough cash from banks to defend the currency, but
not so much that the economy or markets get hit.
Speaker 1 (00:41):
You were listening to Asia Centric from Bloomberg Intelligence. I'm
Krtydmitriva in Hong Kong.
Speaker 2 (00:46):
I'm John League, also in Hong Kong, and today.
Speaker 1 (00:49):
We're diving into all things Hong Kong currency, why the
government is intervening, how we got here, and maybe even
some more existential questions of why we even have a
US PEG. And to walk us through all of this
is Carlos Casanova, Senior Economists for Asia at Union Bonker
preve Welcome to the show, Carlos.
Speaker 3 (01:08):
Thanks for having me and I'm really glad to join
you today.
Speaker 1 (01:11):
Yeah, and it's a really interesting topic. It is suddenly
Hong Kong dollar is hot again. I guess maybe just
starting from the beginning, can you break down why the
government had to step in, Like, how did we get here?
Speaker 3 (01:24):
Well, it has been a roller coaster of three to
five weeks. We've not seen this level of volatility, I
think in a long time, or if at all, since
the establishment of the PEG. Obviously, following the announcement on
reciprocal tariffs by Trump in April, the region as a
whole experienced a lot of EFCS volatility and we saw
broad ust dollar weakening. Hong Kong was not alone. We
(01:46):
saw a lot of speculation around Taiwan, Korea and other
carrier currencies, but Hong Kong experienced very aggressive volatility as
a result, so it touched briefly the strong end of
the band at seven point seventy five, prompted the Hong
Kong Monetary Authority the HKMA, to intervene by buying seventeen
billion US dollars and selling one hundred and twenty nine
(02:07):
point four billion Hong Kong dollars. So the result of
that operation is a massive search in the aggregate balance,
which is an indicator of interbank liquidity, that surged to
around one hundred and seventy four billion Hong Kong dollars
on May sixth, and that's up from just forty four billion,
which had been the norm for quite a few years
prior to this big intervention. Now, that large spike in
(02:31):
interbank liquidity fueled the widening of the three month high
bore software spread, meaning the interest rates spread between Hong
Kong and the rest of the world widened to and
unprecedented two hundred and sixty basis points. And of course,
whenever that happens, you see a lot of carry trade
and demand for honkon dolla, and a lot of speculation
around what that's going to happen. Following that decline in
interbank rates, the spot currency moved so within the span
(02:53):
of a few days it went from the strong end
of the band all the way towards seven point eight three,
which is towards the weekend of the band, and the
twelve month forward outright also rebounded from seven point sixty
eight to seven point a five essentially meaning that the
market was expecting that the Hong Kong dollar, which remained
on the weaker end of the band, for the foreseeable future,
at least the whole year. So what happens when we
(03:16):
hit the seven point eighty five, which we have five
times over the past three weeks, is that the Hong
Kong Monitory Authority to intervene to defend the currency. So
it's bought a total of seventy two billion Hong Kong dollars,
sold a total of nine point two billion US dollars
since June twenty six, and as a result, we've seen
a declining in the aggregate balance to eighty six billion,
which is still double the amount of the forty four
(03:39):
billion prior to Liberation Day. So we are still in
a very liquid situation, but we've seen a lot of
action by the Hong Kong may So if I could.
Speaker 2 (03:44):
Put that in layman's terms, in April, you're saying that
the Hong Kong dollar was too strong versus the US dollar,
and then recently it was two week so the HKMA
had to intervene correct.
Speaker 3 (03:56):
So we saw huge US dollar weekending in April, causing
a lot of strengthening in Asian currencies, Hong Kong Doola
touched the strong end of the band, prompting a massive intervention,
and that caused a huge search in the spread. Of course,
fundamentals typically moved currencies. So because of the very specific
EFS regime that we have in Hong Kong, the Hong
Kong Dola weekend all the way to the weekend of
(04:18):
the band within the span of a few days.
Speaker 1 (04:20):
Now, I know we had asked you to take a
step back and explain all this, which is great. If
we could take another big step back and just talk
about why we have this peg to begin with, Why
is Hong Kong's currency so unique in the region. Why
do we have the peg which kind of leads us
into these tricky situations.
Speaker 3 (04:37):
Yes, so to cover this question, I have to be
the economist in the room, and I have to refer
refer back to an economic axiom called the impossible trinity.
So in Hong Kong we have a fixed exchange rate
and we have free capital flows of course no capital controls.
As a result, we do not have any independent monetary policy. Instead,
(04:57):
the Hong Kong may relies on the interest rates to
by the Fed, So when the Fed hikes interest rates,
the Hong Kong May has to do the same. When
they cut interest rates, the Hong Kong May has to
do the same. This is also called linked exchange rate
system LRS LARS, and it was previously I think that's
a very sort of technical term. It was previously known
currency board. So we've seen examples of currency boards in
(05:19):
Latin America. They were not very orthodox, very strict, so
they didn't succeed. Hong Kong is usually the post a
child for what a currency board should be, and it
was introduced in the eighties to try to address some
of the issues around hot money flows. It was very
volatile prior to that. We are a small export oriented
or externally oriented economy. So of course the currency board
does provide stability, but it comes with its costs. And
(05:43):
there are three principles that are enshrined in the Hong
Kong Constitution, the Basic Law and that are unmovable. So
this is something that oftentimes when we talk with international
investors they don't understand to what extent this is part
of the law of the region. And these are that
any change in the monetary base must be matched by
an equivalent change in foreign exchange reserves, ensuring that FX
(06:03):
reserves cover at least one hundred percent of the monetary base,
and Hong Kong is very good, so we have one
hundred and fifty percent plus FX reserves, so very very
orthodox in that front. The currency must be fully convertible
on demand into a foreign anchor currency in this case
the US dollar, and at a fixed rate, so we
have seven eighty with the MA allowing some volatility around
(06:24):
this band of seven eight five to seven seveny five.
And lastly, monetary policy should be rule bound and automatic,
so the HKMA has no discretionary monetary power to engage
in fiduciary issuing of money, so they have no say over,
you know, whether they want to stimulate the economy with
monetary policy, if interbank raade should be high or low,
they have no say over that. And there are ways
(06:44):
to test the orthodoxy of a currency board through the
reserve exchange pass through and we've done some research recently
that proves that this pass through rate remains within zero
two one hundred percent, so meeting the criteria of an
orthodox currency board. So the aim of the currency board
is to reduce exposure to effects, volatility provides stability to
(07:05):
the region, and in exchange, you have no monetary policy
and you have to adhere to these very strict principles,
which Hong Kong does, and there are some costs that
of course.
Speaker 1 (07:14):
Yeah, and I wonder one of the things, you know,
because you've lived here for about twelve years, right, so
over that period of time, how many times do you
think you've heard this idea that we should unpeg or
Hong Kong should unpeg from the US dollar.
Speaker 3 (07:28):
I have written about this many times over the past
few years. The last time I did a big write
up on the Hong Kong DOLLA was in twenty sixteen,
and at the time I was fortunate enough to reach
out to some of the top academic experts on currency boards,
so Steve Hanke, Johns Hopkins, for example, comes up. And
I was also able to reach out to some of
(07:49):
the Hong Kong Monetary authority officials as part of that research,
just to kind of get a sense of how strong
the political will to support the currency was. So it's
a topic that does come up on occasion, and I
think the reason why it comes up on occasion is
because there's a lot of interest from particularly hedge fund managers,
especially in the US. The reason for this is that
(08:11):
the basic law does not dictate that the Hong Kong
dollars de facto anchor currency is a US dollar, and
neither does it specify a level at which the Hong
Kong dollars should be pegged against the foreign anchor currency,
So that loophole quote unquote continues to serve as the
basis for speculation that breakage could occur. And of course
it's a tail risk. It's a fringe risk, but if
you're a hedge fund manager, you can afford the losses
and if you get it right, you make a lot
(08:32):
of money. So every sort of five to ten years
you get a fresh bout of someone putting, you know,
options and trying to make money out of this possibility.
But we think it's rather unlikely to be frank, So
this is.
Speaker 1 (08:44):
Not a visual podcast. But as soon as you said
hedge funds, John and I looked at each other and
started nodding, made eye contact, started nodding at each other
because we were just talking about this before the show.
Speaker 2 (08:54):
Yeah, like, I think it's it's in hedge fund law.
But you know, George Soros famously broke the Bank of
England I think in nineteen ninety two by forcing the
UK government to withdraw from the European exchange rate mechanism. Interestingly,
Scott Bessont was working for George Soros at that time.
George Soros also tried to break a Hong Kong dollar
(09:15):
peg I think during the Asian financial crisis in nineteen
ninety eight. Do you think this could happen again?
Speaker 3 (09:21):
So we have George Soros, we have Bill Ackman. So
there's a series of very big hedge fund guys who
are also advisors to the Trump administration that have in
the past at least put bets that the Hong Kong
dollar peg would break. I think it reflects their inability
to fully grasp the academic nature of what a currency
(09:44):
board is and what it does. So it's very easy
to look back at historical examples in Latin America and
why that didn't work, or refer back to George Soros
in the eighties speculating against the Bank of England or
even Thailand with the Asian financial crisis. Of course, he
made vast amounts of money with those bets, and to
try to extrapolate the situation on Hong Kong. But the
truth is, Hong Kong has to peg to a currency
(10:05):
that is fully convertible according to the Basic law, and
it has been adhering strictly to the rules that are
enshrined in its Basic law in terms of maintaining currency
board orthodoxy. The Remenbe is not a good candidate for
the Hong Kong DOLLA to repeg against because the Remenbe
is not fully convertible. So what these hedge for managers
have been betting on is that the Hong Kong government,
(10:27):
for political reasons or what have you, will repeg away
from US dollar and towards the Remenbe, and that is
simply not possible under the current legal framework in Hong Kong.
Now there is an argument to be made about whether
or not the peg is serving us. It used to
be the case that Hong Kong's economy was very correlated
with the global business cycle, especially prior to the two thousands,
(10:50):
when China wasn't such a dominant force in the global
economy and global trade. Since then, the Hong Kong business
cycle and the Chinese business cycle have become increasingly correlated,
and we have become increasingly a service provider for Chinese
companies going overseas, and naturally that means that the PEG
sometimes acts as a pro cyclical headwind. By that, I
mean when things are going south, it makes things even worse.
(11:13):
So it's a pro cyclical the cycle is down and
it makes things worse because typically when it happens, the
FED is also hiking interest rates, as we have seen
over the past few years. So there is a case
to be made at some point eventually it will be
necessary to change the board. Now, the Hong Kong may
has done a lot of academic research evaluating whether or
not the PEG brings prosperity to the region, and the
(11:33):
long term view is that it does. The stability provided
by the PEG does bring prosperity. It comes at the
cost of these periods where you have a cyclical downturn
and the PEG exacerbates those pressures. Typically the government is
able to use fiscal to offset some of that pressure.
What has happened is in the past couple of years
post COVID, we now have a deficit which we are
not allowed to have according to the constitution as well,
(11:54):
and so they have less room to do fiscal to
try to offset this. So if this situation of a
strong US dollar continues, which may or may not be
the case, we can get into that in a minute.
But then, yes, the fiscal wouldn't be enough to upset this,
so Hong Kong would be in a very stackflationary outcome
for a long time, and possibly at that point they
could consider moving into something different. In my opinion, it
(12:14):
won't be a repeg, It will be a completely different
EFTs regime based on a basket of currency, similar to
what we see in Singapore. That could happen, but I
don't think the betting on a repag to the remybe
is going to make anybody any money anytime soon.
Speaker 1 (12:27):
What would that look like? You just said if we
don't have a world where the pegged to the RENMNB
makes sense, and you just mentioned that it could be
pegged to a basket of currencies. Could you explain that
a bit more, what that could look like.
Speaker 3 (12:38):
Yes, So what we have in Singapore is a very
similar situation where they have the need to mitigate the
impact of EFX volatility on their system, but instead of
pegging strictly against one currency, they manage the Singapore dollar
against a basket of currencies, and as we are moving
towards a bifurcated world, that would make sense so for
(13:00):
China to broaden the basket of currencies that it uses
in its own management of its its own currency away
from US dollar towards other regional partners. So Hong Kong
could adopt a similar mechanism, and in that case they
would no longer be subject to the FED, so they
wouldn't have to cut or hike interest rates in tandem
with the FED, but they could manage monetary policy easing
(13:22):
and tightening by addressing the slope or the pace at
which they allow the currency to appreciate in trade weighted
terms against their partners. So typically that's what Singapore does.
Hong Kong could study and doing something similar, but it
would require a change in the basic law and that
is not something that you do lightly.
Speaker 2 (13:43):
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(14:06):
If you like what you hear, don't forget to subscribe
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Speaker 3 (14:11):
Calos.
Speaker 2 (14:12):
Can you make the argument that this exchange rate mechanism
didn't serve Hong Kong world after COVID, because you know,
the US dollar was very strong, the US economy was
very strong versus the rest of the world, the US
height interest rates at the same time Hong Kong economically
was suffering. We had a strong currency, we also had
(14:32):
high interest rates, and that really impacted the retail segment
in Hong Kong.
Speaker 3 (14:37):
I think you make a very valid point. It's not
just Hong Kong. We are exiting a world of zero
interest rates, and we are entering a world of higher
for longer with both higher rates in the US, structurally
higher inflation globally, and also higher tariffs. So US consumers
(14:57):
are now facing eighteen percent tariffs that's unheard of since
the nineteen thirty So we are entering and charted territory
in a world where the dollar is structurally stronger and
rates structurally higher than Yeah, Hong Kong faces significant stackflationary risks.
Meaning lower growth and deflation. And keep in mind that
we are importing a lot of deflation from China, perhaps
(15:17):
more so than any other economy, so that would be
a risk for Hong Kong. Where this changes, however, is
if we enter a world of US dollar weakness. So
if the US dollar you know what triggered this big
surge in interbank liquidity. It was the announcement of reciprocal
tariffs in April. It was investors being concerned that a
(15:37):
lack of visibility on US trade policy and to some extent,
domestic policy was eroding US exceptionalism and some of the
rights that come with that, including US dollar strengthening since COVID. Essentially,
so if we move away from a world where the
US dollar strengthens structurally and you have upside on US equities,
if we move to a world where US total equity
(15:58):
returns are flat because you have currency weakness, then it
doesn't put pressure on the Hong Kong economy to the
same extent. So we do think that the FED will
start to cut interest rates towards the fourth quarter of
this year, Hong Kong may will do the same, and
then we are also expecting red cuts in twenty twenty six.
So my guess is that the debate is going to
phase out and fickle out over the coming months and
(16:21):
it won't be such an important point on the policy age,
and then you won't have US hedgeman managers making any
bets against the Hong Kong DOLLA until conditions reverse. So
potentially if we enter another phase of like two to
three years of US dollar strengthening, then it will become
another topic before the time being. I think it is
just a matter of waiting.
Speaker 2 (16:39):
There's probably some hedge fund macro head fund managers that
could be listening to this podcast right now if they
do try to attack the Hong Kong dollar. Does the
HKMA have enough funds to defend the currency?
Speaker 3 (16:51):
They have a lot. So, Hong Kong May has a
lot of EFX reserves. As I mentioned, the law requires
us to have one hundred and fifty percent of the
monetary base one hundred percent. We have over that, we
have one hundred and fifty something percent. I believe Hong
Kong May has made very public remarks in recent weeks
that they are committed to defend a PEG, and you
have to understand the role that accessing US dollar markets
(17:16):
place for China. So until China is able to fully
liberalize its capital accounts, which is perhaps a topic of
another podcast. I mean, if they do, then at that
point it might make sense to repag against them inb
because it would be fully convertible. But the conditions for
them to be able to achieve that will you know,
it will take me with ten or twenty years. So
(17:37):
during that period they will still require an offshore center
in order to facilitate their technological upgrade and enable that
some of these up and coming tech companies can raise
US dollar financing. So we are seeing a huge surge
in the IPO pipeline in Hong Kong because borrowing rates
are lower and US dollar is still a ruble reserve currency.
So I think even if we are in a situation
(17:58):
where that Hong Kong dollar remains on the weekend of
the band for so long, because the speculation by us
A trial managers is, you know, they're so committed to
this trade that they push the Hong Kong are made
to burn through all of its effects reserves. At that
point in China injects like they will not risk accessing
US dollar capital markets via Hong Kong in exchange for
some political you know, making a political statement about the
(18:20):
US dollar through a repeg to a currency that is
not fully convertible in itself. So unless they all agree,
I don't think any individual US actual manager has enough
cash at hand to burn to achieve this outcome. But theoretically,
if it was possible, I think the Chinese government would
intervene because of the important role that Hong Kong serves
as an offshore intermediary.
Speaker 1 (18:40):
So maybe George Sorrow. So if you're listening to our
podcast pro tip, so what's your best outlook? Then, Carlos,
for how many more times the government might have to
intervene from here? Is it sort of like until we
see that first cut from the Federal Reserve? What's your
what's your best outlook here?
Speaker 3 (19:02):
So I think that the Fed will start cutting by
the end of the year, So this situation should at
least last until the end of the year. The hybrid
rates are abnormally low, so the overnight rate I think
is just slightly above zero percent. The three month high bore,
which banks are now using to price mortgages is around
two percent, so we do expect that hybrid rates will
(19:22):
go up, but they will stabilize at levels that are
higher than or we had prior to the Liberation Day
tariffs because of a myriad of factors, including the fact
that you are having more easy in Man and China,
and the demand for credit in Hong Kong with the
situation in the housing sector just isn't very high. So
we do think that higher rates go up from here,
but they will stabilize at lower levels, and that is,
(19:45):
in my opinion, actually moderately stimulative for Hong Kong assets,
including both equities equities first and then even real estate.
So now with mortgage rates at two percent, yields at
three percent, there's a one percent positive carry, perhaps not
super enticing, but enough for a certain group of the
population to maybe dip their toes if it's the first
time buying a house, for example. So I think it
(20:07):
actually is a net positive for the Hong Kong economy,
and I think it's a positive that lasts until the
end of the year. Beyond that, really it's a matter
of how steep the FED cutting cycle is going to be.
They've been on a pause since December, and so if
they do four, it's definitely very good for Hong Kong.
We will have a week a dollar and then lower
(20:27):
rates overall. But if for whatever reason, inflation overshoots domestic
to private, domestic demand in the US remains robust and
the FED can't do as many cuts, then Hong Kong
will continue to be in a bit of a tight spot.
Speaker 2 (20:40):
Carlosa, Hong Kong's a new stable coin law will be
implemented on the first of August. Now, if this is
successful and there's stable coins backed by Hong Kong dollars,
and if this leads to increased demand for Hong Kong dollars,
how does this fit into what we've been discussing. Does
this help the Hong Kong Authority?
Speaker 3 (21:00):
Is if there's increased demand for Hong Kong dollar, which
we should see increased demand for hongkon dolla regardless because
of the free money that you can get from the
carry trade. If George Soros is listening, perhaps that is
a better idea than betting against the peg, and that's
what's going to sort of eventually mop up the ad
(21:20):
something excess billion in the aggregate base. So if you
have additional demand, because you know the IPO cycle is strong,
so you have demand for honknd doll because people want
to participate in that upside. And you also have this
hype around stable coin, and I don't think anyone understands
what the future of stable coin is and whether it's
going to fuel the dollarization trends or not, but it
(21:40):
is possible that at the very least people will want
to participate, and so it could fuel demand for hongkon dola.
In that case, you would of course see interbank liquidity
getting drained and you would see the interbank rates going up,
and that would mean that this moderately stimulative condition that
Hong Kong is enjoying right now would no longer be
in place. So it does actually make the life of
(22:02):
them a little bit more complicated. But if that's the case,
I think they might be okay with it because of
the potential long term gains of being an innovator or
a first mover in the stable coin and cryptocurrency space,
which seems like something that they tried to promote.
Speaker 1 (22:19):
You know, it struck me as we were talking earlier
about Trump and Trump's tariffs on Liberation Day and the
sort of back and forth that that's caused. I mean,
whiplash globally for everyone, But could potentially the Hong Kong
monetary authorities intervention also catch his eye for the wrong reasons.
In other words, you know, Trump has gone on about
(22:43):
the problem or the issue of countries intervening in their
own currencies, especially China, you know, China being top of
that list. So could this be perceived, you know, Hong
Kong authorities going in to defend the currency. Could it
be seen potentially as currency intervention and sort of catch
Trump's eye?
Speaker 3 (23:00):
I think so. Trump's administration has in the past made
remarks about countries that they perceive should be on the
currency manipulation list, and some of those remarks don't always
make economic sense. For example, when China was intervening to
prevent its currency from depreciating further, and they called China
a currency manipulator. Perhaps some of it Trump's advisors are
(23:23):
still thinking about the early thousands when China essentially kept
its currency undervalued to benefit from all of the upsides
from joining WTO and participating in the global system. But
more recently, what we have seen since the introduction of
the CFTs, the current FS regime in China in twenty fifteen,
(23:46):
is that the currency has structurally weakened about one point
three percent per year, and that's in line with structural
slowdown in the Chinese economy. So China is intervening to
prevent that from being even faster, So from preventing that
structural slowdown from taking place even faster, potentially resulting in
capital outflow pressures and exacerbating If you have a big
capital outflow, it will be very difficult for you to
(24:07):
restructure the domestic debt. So they're trying to focus on
that domestic debt restructuring before they allow any sort of
outflow or reform to the capital account front. But so
we have seen a ten year period of weakness with
the Chinese Central Bank intervening to prevent this from being
even more dramatic. And I think Trump's understanding of the
situation isn't one hundred percent correct, so it could get
(24:29):
his attention, but I think that even if it does,
it might be futile because they are a bigger fish
to fry. For example, what comes next to what are
the next ten years of the Roman bee? I think
that's probably a bigger policy question for the US. And
by the way, we have also looked at research on
FX regimes in China and they do seem to pivot
every ten years or so. So the time is ripe
(24:52):
for China to announce a NEWFX regime, and the world
is moving towards increased by furcation reduced trade dependency on
the US, So I think that is a bigger question
if China enters a phase where they allow the currency
to depreciate even further over the next ten years, but
in a controlled manner, so they don't have outflows, but
they reap the benefits from being able to preserve their
(25:12):
terms of trade and export high value added goods while
simultaneously restructuring their domestic debt. That's a bigger threat than
Hong Kong Dolla being very by the books and sort
of following the Currency Board orthodoxy and principles. I would
say it's more likely that he will be dissatisfied with
the pboc's inability to strike a deal on the currency front.
(25:33):
So this is one of the things they're talking with
Korea and with Japan. China has been obsessed with the
Plaza chord for the longest time. They have studied the
Japanese last decades, and if you look at the discourse
amongst domestic economists in China, it's perceived as a big mistake.
So the Plaza chord was a big mistake for Japan.
That's to be debated, but in Chinese policy circles they
(25:54):
consider that that was a trigger for the last decades.
So I don't think China is going to agree to
strengthening their currency against the US dollar. So I think
that whatever happens in Hong Kong could catch his eye,
but very soon he will focus on the situation in
China because it looks like they're going to allow the
currency to appreciate even more over the next ten years
as part of a new FX regime.
Speaker 1 (26:14):
Interesting stuff, fascinating discussion. We cover a lot of ground.
Speaker 3 (26:17):
Yeah, thanks, all very interesting topics and we are definitely
entering a pivotal moment, so it's a very crucial topic.
Speaker 1 (26:23):
Yeah, thank you so much for joining us. Thanks you've
been listening to Asia Centric from Bloomberg Intelligence and Katim
Trieva in Hong.
Speaker 2 (26:30):
Kong, and I'm John Lee also in Hong Kong. This
podcast was produced and edited by Clara Chen. You can
also listen to all our prior episodes on Apple podcasts,
Spotify or ever listen. Thanks for listening, See you next time.
Hosts And Creators
John Lee
Tom Corbett
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