Hong Kong’s financial war chest is big enough to withstand any 1998-like short sellers’ attack, says monetary authority’s chief

South China Morning Post 發布於 2019年09月16日09:09 • Enoch Yiuenoch.yiu@scmp.com
  • Hong Kong financial market is much bigger two decades later, making it too expensive for short-sellers to successfully attack
  • No evidence of big capital flight due to protests, Chan says
Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, speaks at the Treasury Markets Summit. Photo: Jonathan Wong

Short sellers could not successfully attack the Hong Kong stock and futures markets now like they did in the Asian financial crisis because the city's financial market is much larger and they would need "much more bullets" than they could afford, said Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority, the city's de facto Central Bank.

Short sellers in 1998 tried to force the government to delink the local currency's peg to the US dollar by attacking the stocks, futures and currency markets. They successfully forced interest rates to go up and stocks and futures to go down, but failed to corner the government into delinking the currency to the US dollar. Instead, the government intervened to bolster the stock market.

"There has been some normal short sell position, but the size is not substantial. We have not seen big short sell positions opening in the Hong Kong dollar recently," Chan said on the sidelines after the Treasury Markets Association's annual summit on Monday.

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"The financial market in Hong Kong is much bigger nowadays than at the time during the Asia financial crisis in 1998. The short sellers who want to attack the local currency would find they would need much more bullets to carry out the attacks, which would be too expensive for them to so," Chan said. "As such, the public does not need to worry about the short sellers' attack to the peg as they would not be able to repeat what the short sellers were doing during the Asian financial crisis."

The Hong Kong dollar has been linked to the US dollar since 1983, and is seen as providing stability to the currency and the city's economy. It is now allowed to move within a trading band of between 7.7500 and 7.8500.

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During the Asian financial crisis, currency speculators attacked the peg by selling stocks, index futures and Hong Kong dollars in currency markets, leading to a sharp rise in interest rates. It drove the one-month Hong Kong dollar interest rate " or Hibor " up to about 20 per cent. The interest rate spike weighed on the Hong Kong stock market, and the government intervened by tapping the Exchange Fund to spend HK$118 billion to buy blue chips. The following year, the government sold its shares, making a handsome profit.

But the unprecedented anti-government protests have led some hedge fund managers, such as Hayman Capital Management's Kyle Bass, Crescat Capital's Kevin Smith and Trium Capital's Thomas Roderick, to predict that a surge in capital flight from Hong Kong might force the city to drop its currency peg against the US dollar.

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Chan disagreed, however, that such a possibility is in the cards.

The Exchange Fund, the war chest of the local reserve to defend the currency against short sellers, stood at HK$4.138 trillion (US$528.73 billion) at the end of July, or two months after the first major protest on June 9.

That is 4.5 times more than the level at the end of 1998, when it was HK$921.4 billion.

The Hang Seng Index dropped about 5 per cent from June to the end of August.

But it has been on a tear of late, rising 6.3 per cent in the first two weeks of this month, largely due to improved sentiment on trade and a move by city chief Carrie Lam Cheng Yuet-ngor to give in to one protester demand and formally withdraw a highly unpopular extradition bill that originally sparked the demonstrations.

In comparison, the Hang Seng Index dropped more than 50 per cent during the Asia financial crisis before the government intervened.

"We have not seen any major capital outflow in recent months. There are some clients asking about opening accounts overseas, but the private banks have not seen clients ask to transfer a massive amount of money out of Hong Kong. The local deposit numbers are holding up well," Chan said.

He also pointed out that Hong Kong dollar has strengthened against the US dollar in recent days as the improved market sentiment has led some mega initial public offerings to resume in Hong Kong.

Logistic giant ESR Cayman and brewery company Budweiser, which cancelled their offerings in June and July respectively for a combined US$11.04 billion, revived their IPO ambitions last week.

The protests have pushed property prices down 0.3 per cent. But Chan said that it is too soon to relax mortgage polices that are intended to cool down overheating in the property market.

"We will closely monitor the market. Only if we confirm there is a downward cycle of the property market would we will relax the mortgage policies," Chan added.

Credit Rating agency Fitch has downgraded the rating for Hong Kong due to the unrest.

"We do not see there would be a big impact on the cost of funding," he said of the Fitch downgrade. "Hong Kong remains an international borrowing hub for companies. We would like to see the social order to return to normal."

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