Activist fund manager Bill Ackman is betting Hong Kong’s Monetary Authority will repeg its currency at a higher value against the dollar. That makes sense, given the divergent paths of the U.S. and Hong Kong economies, but could hurt the city’s competitiveness and do little to curb inflation. Bets like Mr. Ackman’s only encourage authorities to dig in.
Since 1983, Hong Kong’s dollar has been pegged within a range of 7.75 to 7.85 against the U.S. dollar. The idea was to support the then-British territory’s currency against uncertainty over its handover to China. Now it’s the U.S. dollar that’s sinking. Hong Kong’s fortunes are tied to booming China. Yet to maintain the peg, Hong Kong has to move its interest rates roughly in line with those in the United States. Real rates are thus negative, property prices are soaring and Mr. Ackman’s bet is that rising prices and public anger will force authorities to raise the Hong Kong dollar by 30 per cent and eventually peg instead to China’s yuan or a basket of currencies. By buying call options on the currency, he reckons he could net at least a 3,600-per-cent profit.
If only. Hong Kong isn’t a big economy driven by consumption. It’s a tiny entrepôt reliant on exporting into the global economy, where trade is for better or worse still conducted primarily in U.S. dollars. With exports twice the size of its GDP, the only place more reliant on trade is rival Singapore.
With global growth ebbing, handing what would effectively represent a 30-per-cent pay rise to Hong Kong’s work force might not be the best way to signal stability to Hong Kong’s exporters. Nor might it curb inflation much. Hong Kong’s soaring prices are as much about loose yuan as loose dollars. One of every 10 Hong Kong properties sold is to a mainland buyer.
By publicizing his bet in a 152-page presentation, Mr. Ackman may hope other investors will pile in, forcing authorities to take his advice. Sustained inflows would compel Hong Kong to print money to maintain the peg. Such inward bets are dangerous, particularly when speculators declare victory and head home. Hong Kong is less likely to give in to revaluation, therefore, than to find ways to make sure bets like Mr. Ackman’s don’t pay.