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