American hedge fund billionaire bets on collapse of Hong Kong currency

Since 1983, the Hong Kong dollar has been pegged to the US dollar. Tiny movements against the US currency are allowed. The connection took place when China was in the process of opening up to the outside world and Hong Kong was a safe haven. The situation is very different now.

Challenging China

It is 25 years since Hong Kong was returned from Britain to China, which has become the world’s second largest economy. Hong Kong is promised a certain form of self-government until 2047 under an agreement signed in 1984. Britain believes China has broken the agreement.

Hong Kong appears more and more like a Chinese city, but with its own currency. The American hedge fund leader William “Bill” Ackman, who is behind the hedge fund Pershing Square, confirms that he has entered into a large short position against the Hong Kong currency via so-called “put options”.

“If China is truly a great, independent nation – why do they have to peg their currency and the Hong Kong currency to the US dollar,” Ackman asked in a Twitter thread.

– The link is almost embarrassing for China at the same time as they disconnect from the US economically, Ackman wrote in another message, which has since been deleted.

The Chinese currency was linked to the US dollar until 2005. For the past five years, the yuan has been linked to a currency basket consisting of the 24 largest trading partners, and of which the US dollar accounts for around 22 percent, according to the China Foreign Exchange Trade System.

Previous attempts fail

In 1995, the size of China’s economy, measured in terms of gross domestic product, was five times larger than Hong Kong’s. Last year it was 48 times larger, according to the World Bank.

The Hong Kong Monetary Authority, acting as a central bank, defends the Hong Kong dollar. If the US central bank (Fed) raises the interest rate, they do the same – without taking into account the local economic situation in the city.

– The authorities in Hong Kong show no intention of changing the system, says currency strategist Carrie Li at DBS Bank to Bloomberg.

Representatives of the self-governing authorities in Hong Kong deny that it is being considered to remove the link to the US dollar. Ackman comes up with a response to those who do not believe there will be changes.

– Until the moment the currency peg is removed, they will claim they will never remove the link. It is elementary, he writes.

George Soros and Kyle Bass have previously tried to challenge the link with big bets without success. Soros is known as the man who sank the British pound. When the pound was devalued in 1992, its value fell by 15 percent, and Soros made at least a billion dollars from the trade.

– No meaning for Hong Kong

Hong Kong is in a deep recession after value creation fell by 4.5 percent in the third quarter compared to the same quarter last year. This is the second recession in three years. The Hang Seng index at the stock exchange has fallen by 40 per cent in five years.

The city’s Finance Minister Paul Chan admits that it is likely that the once dominant Asian financial center will end the year in recession.

– Hong Kong has raised interest rates at a pace that has never happened in the last three decades, Chan said earlier this autumn.

The Hong Kong Monetary Authority has sold over $30 billion from its foreign exchange reserves this year to defend its peg against the US dollar. In 2019, when it also had to defend its own currency, it held just under three billion dollars, according to the Wall Street Journal.

– The link makes no sense for Hong Kong, and it is only a matter of time before it breaks, writes Ackman.

Long-term time horizon

For many years, Ackman has gone hard against individual companies and shorted shares in the belief that prices will fall. Ackman is in regular confrontations with other investors and has made big money on bold stock bets. He has also lost significant sums.

He made $2.6 billion during the onset of the pandemic on a bet that companies would struggle to service their debts.

“Many of our best investments have come when other investors, with short time horizons, write off good companies that have extraordinarily attractive prices when you have a long-term horizon,” Ackman wrote in a letter to clients and investors in Pershing Square when he bought shares in Netflix before the company presented lousy accounts.

He threw in the cards in April. The Netflix price has more than halved since the New Year, but has also risen by 55 percent in the past six months.

“Although Netflix’s business model is easy to understand, in light of recent events, we have lost faith in our ability to predict the company’s future prospects with sufficient certainty,” he wrote in a letter to Pershing Square shareholders.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links, which lead directly to our pages. Copying or other forms of use of all or part of the content may only take place with written permission or as permitted by law. For further terms see here.

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