Mystery talk provides unnecessary incentive
Jake van der Kamp
Some of the official comments in Hong Kong and the mainland on devaluation rumours have become worrisome, because more can be made of them than really ought to be.
A good example is the mainland's ambassador to India, Zhou Gang, saying in a speech the other day that further declines in the yen would hurt the mainland economy and possibly lead to Beijing rethinking its policy of not devaluing the yuan.
Why anyone should think that an ambassador to India has a big say in the mainland's currency policies is a good question but it made the headlines.
More troublesome is our own financial secretary, Donald Tsang, making threats to stamp on currency speculators. His exact words are worth quoting again.
'I am certain if anyone is speculating against the Hong Kong dollar peg we have the skills and strategies to handle it quite easily. If speculators want to attack the Hong Kong dollar they will be punished as usual. I cannot give out details of the tactics, because our intervention in the market and fight back against speculators would need some element of mystery.' There is undoubtedly another assault on financial markets taking place at the moment and it has the usual hallmarks - big foreign houses taking big short positions on the futures, then encouraging devaluation rumours with HK dollar selling, pushing things along further by selling index-sensitive stocks like HSBC and waiting for the index to fall to clean up on their futures positions.
Two things make Mr Tsang's 'mystery' talk a little disturbing.
The first is that the Government's currency operations are not meant to be a mystery. Hong Kong runs a modified currency-board system and this is supposed to be simple and clean.
HK dollars are created when the Hong Kong Monetary Authority (HKMA) accepts US dollars in exchange. They are taken out of the system again when people want their US dollars back. If this creates a shortage of HK dollars then local interest rates go up until people want HK dollars again.
It's not actually quite so clean, as the HKMA influences currency movements by controlling the aggregate clearing balance of the banking system. But even here it publishes the changes every day to dispel the mystery.
Mystery particularly needs to be dispelled at the moment, because the HKMA has recently sold US dollars for HK dollars to cover the deficit the government is running. This has prompted talk of there being official intervention not just to cover a deficit but to influence the currency market, taboo in a currency-board system.
The more Mr Tsang talks of mystery, the more he will encourage a belief that such intervention is truly taking place and the more incentive he will give to speculators to make their attacks.
They have long accepted that a properly maintained currency board run by the rules is impervious to attack. They have been waiting for signs that it is no longer run by the rules and here they seem to have one.
The second reason it is disturbing is that it gives the impression of an all powerful monetary authority that has nothing to fear but slaps at little pests because it does not like them.
Let us remember here that Hong Kong is still a small place and, although its reserves are large, they are dwarfed many times over by the funds under management run individually by a growing number of American firms.
If there was no danger why bother to comment? Why put pressure on prominent people in business and public bodies, as the Government has done, not to suggest that devaluation is possible? Of course there is a danger of it. If the people of Hong Kong collectively come to the view that the peg cannot hold then it will not hold. Nothing can prevent its collapse if this mandate of heaven is lost.
And the people may very legitimately come to the view that in a true test of strength Mr Tsang may prove weaker than the combined forces of foreign speculators. Why encourage them in that view with puffed up bully talk?