THE misunderstandings and misconceptions that exist with Hong Kong residents, the Government and its advisers about the territory's monetary policy has now reached dangerous proportions. The so-called peg of the Hong Kong dollar to the US dollar has been presented, either by the error of omission or commission to the public, including economists and bankers, as something entirely different from that which it is. As always, whenever any monetary or financial matter is misunderstood, it causes people and institutions to take unnecessary risks. It is important that the myths on this most important subject be de-mythicised. The peg does not offer a solution in the case of a possible panic over the value of the Hong Kong dollar. On the contrary, it holds out a false hope that in a panic anyone can exchange Hong Kong dollars for US dollars. The weakness, which is not usually mentioned, is that the Exchange Fund does not have even a fraction of the US dollars that would be required to give everyone US dollars in return for Hong Kong dollars. Actually, it would be the height of foolishness for the Exchange Fund to hold the amount of US dollars required. Let us hope that the Hong Kong government reserves or the Exchange Fund are in currencies that pay higher interest rates than US dollars. Once and for all, let us admit that the peg does not offer 100 per cent backing to every Hong Kong dollar enabling redemption in US dollars. The peg is only a promise to pay, and everyone knows that an IOU promise is never equal to the real article. It is a myth that the peg is like the gold standard. There is no resemblance between a currency redeemable in US dollars, which are a liability of the nation with the largest debt of any nation in history, and gold, which is an asset with no liabilities whatever. The US was on the gold standard over half of this century, and it had gold equivalent to the currency held at Fort Knox, Kentucky. This is as close as possible to a real standard. In the early 1970s the US abandoned the gold backing and now the US dollar has no intrinsic value and is merely a good piece of paper spoiled by ink stains. It isn't worth a farthing. It is not issued by any government, but by the US Federal Reserve, which isn't even an agency of the US Government. It has been stated that the peg is ingenious. Former Secretary for Monetary Affairs Douglas Blye, who established it, stated that it was a short-term solution to a short-term problem but could not endure long because Hong Kong could not maintain enough US dollars in the Exchange Fund to enable it to function in an emergency. I do not deny it served its purpose as a short-term fix in 1983, but it cannot work within the system as has been claimed. As for it having been tested because in 1984 interest rates soared; interest rates are controlled in Hong Kong by a bank cartel, which profits by soaring interest rates. This is a matter completely irrelevant to the peg. As for the Hong Kong peg being proven to be a good system since the ERM failed, this is hardly proof. The ERM failed because of speculators using derivatives; no such attack on the Hong Kong dollar has yet been attempted. It would be surprising if the peg could resist many billions of dollars of short-selling the Hong Kong dollar with derivatives which brought various currencies down in the ERM. The fact is that the peg system has never been tested with hundreds of people queued up outside banks demanding US dollars for Hong Kong dollars. Such runs on banks are not unique in history, and can happen in Hong Kong. It is claimed that the peg was endorsed by such eminent people as Nobel Prize Winner Milton Friedman. Yet I have read everything I have been able to find that Milton Friedman has written. My conclusion is that he is overwhelmingly against governmental tinkering with the economy and prefers a floating rate to an authoritarian monetary policy. Mr Friedman does not subscribe to a permanent peg of a currency to the US dollar, since it brings the currency under the control of the US Federal Reserve System. Mr Friedman has no kind words for the US Federal Reserve System, as he believes they were responsible for the bank failures of the 1930s and many of the US monetary problems since. Since the peg, Hong Kong has been gutted with the world's highest inflation rate except for Greece and Russia. The easy answer which we are told is that there is no proof that inflation could be reduced to a reasonable two per cent if the peg were to be cut off. There is no proof because it hasn't been tried. There is abundant proof that without the peg monetary policy could be used to control inflation. In the US in 1982 inflation was about 17 per cent. Paul Volker was placed in charge and he brought the US prime interest rate up to well over 20 per cent andinverted the yield curve for a full 18 months. Inflation quickly stopped dead in its tracks. No recession occurred and the economy embarked on its greatest peace-time boom. It appears that it is only the vicious and cruel peg that reduces Hong Kong's standard of living, reduces exports and prosperity. It is high time Hong Kong people realise that Mr Blye's temporary fix was just that, and get on with the important task of reducing inflation, lowering taxes, and promoting prosperity in Hong Kong. It is absurdly incorrect to state that the peg has promoted stability. The US dollar has been among the most volatile of all the world's currencies since 1983, and the peg made certain the Hong Kong dollar would be an equal partner in this volatility. All people and institutions who held Hong Kong dollars or investments in 1983 have been cheated out of two thirds of their wealth by the arrogant clinging to this $7.80 whim peg. I repeat, the architect of the peg, Mr Blye warned of great damage if it were to be extended beyond a short temporary period because the mechanism does not exist to make it functional. Land of opportunities A RECENT visit to Malaysia, where held meetings with executives of corporations, banks and major investors, confirmed what the published statistics have been indicating for over a year. Malaysia offers countless investments, distributions and entrepreneurial opportunities. Inflation is about 3.5 per cent, interest rates are about seven per cent, with real GDP at about 10 per cent. This is an illustration of the prosperity an effective monetary policy can provide. The Malaysian stock market (KLSE Index) and neighbour Singapore are having a phenomenal bull market year, which appears likely to extend into 1994 and beyond. The Malaysian stock exchange lists about 450 stocks. Many major international companies have recently opened Asian manufacturing plants and distribution centres. On many days in 1993 the Malaysian stock market had more volume than the giant US market. In analysing equities it appeared to me that most of the blue-chip investment stocks are a bit on the expensive side. The cause is obvious as the reason is the same that the Hong Kong stock exchange is experiencing. There are over 4,000 mutual funds in the US. The price of US stocks with low dividend yields is so prohibitive that US Fund Managers are now turning to Southeast Asian stocks. Most of these US Fund Managers have little knowledge or experience with Asian equities, so they tend to only buy the highly capitalised blue chips, which has driven their prices to an area where they are becoming over-priced. However, the smaller capitalisation or lesser-known stocks have not been driven upward and many good values can be found by analysing this category of equities. As an example, one of the several stocks that appeals to me is MBF Holdings. Current price is about 1.10 Malaysian ringgit, which translates to less than 40 US cents per share. The price is 13 times earnings. It has a clean balance sheet and has financed its growth from earnings; in 1992 revenue was up nearly 75 per cent with increase in assets nearly 50 per cent. One of the reasons the price is so low is because it is a difficult company to analyse since it is so highly diversified in products and services as well as countries. At first glance it appears to be an unmanageable conglomerate. However when you take the time to study it in depth and meet some of the executives you can see that all the pieces fit together and support each other. Its financial operations has Master Card franchises in other countries, even including Vietnam and Papua New Guinea, as well as being the largest credit card issuer in Malaysia. MBF has a newly started Hong Kong finance division, MBF Asia Capital Corporation Holdings Ltd, with emerging finance businesses in China and Vietnam. The Hong Kong subsidiary is now involved in a joint venture to construct a US$1.2 billion power plant inthe Philippines. This will be a hydropower plant for irregation and flood control as well as to supply power. In Malaysia it is the largest manufacturer or disposable medical glove, and it manufactures seemingly everything from telecommunications equipment to construction equipment. It operates fast food outlets, as well as providing brokerage services, mutual funds and educational services loans. MBF is listed on the Malaysian stock exchange several times because of its several subsidiaries. Most investors should ignore the various subsidiaries and only buy stock in the parent, MBF Holdings as the lions share of all funnel back into the holdingcompany. Leon Richardson is a well-known financial commentator and investor.
