John Tsang Chun-wah's budget U-turn has had an unexpected effect.
The financial secretary's flip-flop turned him into an object of ridicule among the people of Hong Kong. But it also caught the eye of a different group altogether: international currency speculators. And they are not laughing. They scent an opportunity.
When he delivered his budget in February, Tsang faced a dilemma. On the one hand he was confronted with mounting inflation. The conventional counter-cyclical response would have been to tighten the purse strings. But on the other hand Tsang was besieged with demands to hand out some of the government's huge pile of excess reserves to the people.
The financial secretary came up with what he obviously thought was an elegant solution. Instead of giving away cash, which could exacerbate inflation, he proposed to inject HK$6,000 into everybody's Mandatory Provident Fund account.
The offer sparked instant outrage, not least from Hong Kong's army of civil servants who, with their own defined-benefits pension scheme, would have missed out on the goodies.
Assailed on all sides, Tsang surrendered. Just a week after his budget speech, he changed his mind and announced he would in fact dole out HK$6,000 to every Hong Kong permanent resident in cold hard cash.
The financial secretary's abrupt U-turn caused a handful of hedge fund managers and other speculative traders to sit up and take notice.
Fancy that, they reasoned. If Hong Kong officials crack so easily, maybe they are not such tough nuts after all. Perhaps under pressure, Tsang would prove no more resolute in defence of the Hong Kong dollar peg than he proved in defence of his budget. We should have a punt.
Mention of hedge funds eyeing up the Hong Kong dollar peg will instantly recall memories of 1997, when speculators launched an all-out short-selling assault on the Hong Kong dollar in the belief that the government would be forced to abandon the peg and devalue the currency.
This time around, however, no one thinks the Hong Kong dollar is overvalued. Quite the opposite. Things have changed over recent years. Because of its peg to the declining US dollar, the Hong Kong dollar has fallen steeply against the currencies of the city's trading partners and competitors.
To see just how much it has fallen, take a look at the first of the two charts below. Rebased to May 2005, immediately before China's revaluation of the yuan, this shows the nominal effective exchange rate of the Hong Kong dollar plotted against the yuan and the Singapore dollar. Whereas both the yuan and the Singapore dollar have appreciated around 15 per cent, the Hong Kong dollar has slumped 13 per cent. As a result, says one foreign exchange analyst, the Hong Kong dollar is now 'the most undervalued currency on the planet'.
In response, speculators have started buying Hong Kong dollars in the foreign exchange market. They reason that sooner or later the relative undervaluation of the currency is likely to attract fresh inflows of capital into Hong Kong, causing a new round of property price rises and driving consumer inflation up to painful levels.
That would be nothing new. In the mid-1990s, property prices went through the roof and inflation hit double-digit levels.
But the speculators suspect that Hong Kong people are not made of such stern stuff today as they were then.
They think that if inflation were to climb towards 10 per cent again, the government would find itself coming under intense popular pressure to abandon the US dollar peg, with politicians of all stripes calling on the financial secretary to revalue the currency and hitch it to the yuan in a bid to quell rising prices.
For the speculators, buying Hong Kong dollars is a bottom-drawer trade: one to put in place and forget about. The position is cheap to fund, and the currency is extremely unlikely to fall. In fact, as the second chart below shows, buying pressure over the past three weeks has pushed the Hong Kong dollar from the middle of its trading band against the US dollar towards the strong side.
And there is always a chance that at some point next year, the financial secretary will cave in to popular discontent over mounting inflation - just as he caved in over the budget - and ditch the peg to the US dollar, in which case the speculators will stand to make a fortune.