Traders queue to join in market's ATM game

Imagine that you had arrived on the scene just as the banks were installing their first automated-teller machines (ATM) and watched as some customers used them.

Push a few buttons and, bingo, out comes cash. What a great idea. You watch it a few times and then decide to do it yourself.

Something analogous is happening in Hong Kong's financial markets at the moment. Traders at big American investment banks have for some time referred to the combination of the Hong Kong dollar, the stock market and the Hang Seng Index futures as their personal ATM.

They push the buttons by first working up a scare about the local dollar and simultaneously take short positions on the futures. As Hong Kong dollar interest rates then go up, they sell down a few index-sensitive stocks, say HSBC and HK Telecom, to help things along.

Bingo. The index goes down, they clean up on their short positions and the cash flows out of the ATM.

They have checked in at the ATM several times this year as the chart indicates. And now a few of the outsiders of this game want into it as well, which is why the latest bout of Hong Kong dollar selling features reports that it involves more than a few US banks alone.

It is a good time to play the game. Firstly, there have again been increasing predictions and rumours recently that the mainland will devalue its currency. It will be about the third time this year that the devaluation push has been on.

It has not gathered enormous strength yet. Most pessimists, having been proved wrong the last two times, are restricting themselves to forecasting a devaluation next year. But the mainland economy definitely has its troubles, which constitutes some grounds for talk of devaluation, and received wisdom has it the Hong Kong dollar peg cannot hold if the yuan is devalued.

Secondly, HSBC Holdings has reported a decline in earnings because of larger provisions than most people had expected. This is the most index-sensitive stock of them all, the best tool for manipulating the index, and it is therefore a wonderful time to push the buttons at the ATM again to see what cash it produces.

Never mind that the mainland runs an enormous and rising trade surplus, that its inflation rate is down to zero or less, that past devaluations have more than compensated for past inflationary excesses and there is no hard evidence of it losing export market share because of a strong currency, all of these factors that would normally lead to revaluation rather than devaluation.

Never mind that HSBC reported a 13 per cent increase in operating earnings, is raising its interim dividend by 14 per cent and is weathering the Asian storm as well as could be expected with no self-inflicted losses to worry about.

This ATM operates on perception, not reality. It produces no money for people who actually have accounts with it.

But if the Hong Kong dollar is truly under threat, the evidence of it will have to constitute more than a queue of new hopefuls waiting to press the buttons.