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A protester sets fire to an HSBC lion statue outside the bank's headquarters in Central following a pro-democracy march in Hong Kong on January 1, 2020. Photo: AFP

Capital markets dismiss doomsday prediction of ‘full-fledged’ banking crisis in Hong Kong by short-seller Kyle Bass

  • ‘It takes about a year for a full-fledged banking crisis to hit, and you’ll see a full-fledged banking crisis in Hong Kong now,’ founder of Hayman Capital says
  • The Hong Kong dollar’s ‘tear’ higher presented an attractive opportunity to short the currency via the options market, according to Trium Capital

Kyle Bass, the hedge fund manager who’s been shorting Hong Kong’s currency, said the former British colony faces a banking crisis in 2020, mirroring the struggles of Iceland and Ireland a decade ago.

“It takes about a year for a full-fledged banking crisis to hit, and you’ll see a full-fledged banking crisis in Hong Kong now,” Bass, founder of Hayman Capital, said.

The Dallas-based money manager pointed to an economy mired in recession, a high ratio of banking assets to gross domestic product and collapsing retail sales amid political unrest.

Hayman hedged for this situation by betting on the US dollar against the Hong Kong dollar, Bass said. His firm isn’t making bearish bets on local stocks because he is concerned that officials in China and Hong Kong will prevent short-selling of equities.

The Hong Kong dollar is currently trading near 7.77 per dollar, after rallying to a three-year high of 7.7624 per dollar last week. Its trading band of 7.75 to 7.85 per US dollar, set in 2005, has never been broken.

Investors sharpened focus on Hong Kong last year as an extradition bill stoked tension over the pursuit of democracy and relationship with China. Beijing’s new liaison to the city, Luo Huining, recently said he’s “fully confident” that the unrest will stabilize, while the Hong Kong Monetary Authority expressed its confidence in the peg to the dollar and the strength of the banking sector.

Skeptics of the doomsday thesis say Hong Kong has both the ability and willingness to defend the peg, which its currency board has called the “cornerstone” of the city’s financial system. George Soros tried and failed to break its peg to the U.S. currency during the Asian financial crisis in 1998, while Crispin Odey bet against the Hong Kong dollar for more than two years before giving up in mid-2018.

Kyle Bass, chief investment officer of Hayman Capital Management. Photo: Bloomberg

Hong Kong dollar peg: could democracy act spell the end of the city’s US dollar peg?

This time, few seem to be listening to Bass. While few doubt that Hong Kong’s economy is suffering after seven months of anti-government protests, the city’s markets have shown little sign of an impending banking calamity.

A gauge of the city’s financial stocks is trading near an all-time high after outpacing gains in the broader market this year and posting an advance of nearly 1 per cent on Thursday. While interbank borrowing rates have increased over the past 12 months, they remain far below levels that preceded previous crises.

The Hong Kong dollar has recently strengthened toward the strong end of its trading band against the US dollar while the Hong Kong dollar deposits were little changed at HK$6.9 trillion (US$888 billion) in November.

Hong Kong withstands protests with only a trickle of ‘fright capital’ fleeing to Singapore, MUFG Bank estimates

Howard Lee, a deputy chief executive at HKMA, wrote in a blog late last month that the city’s financial markets are stable, supported by a “well-tested” currency peg and “robust” banking sector. It has not seen any significant fund outflows since the protests began, he said.

“Yes we are in a recession, but living in Hong Kong you can see that property prices, the stock market, they’re still doing relatively well,” said Kenny Wen, a strategist at Everbright Sun Hung Kai Co. in Hong Kong. “I really don’t think we will see a banking crisis in the near future.”

Hong Kong protests: no plans for foreign exchange controls amid online rumours of more curbs

Still, the Hong Kong dollar’s recent climb to the strongest since early 2017 could be tested soon, according to London-based hedge fund Trium Capital, which is betting against the local currency. The Hong Kong dollar’s “tear” higher presented an attractive opportunity to short the currency via the options market, portfolio manager Thomas Roderick said.

While recent initial public offerings have tightened liquidity and easing tensions within Hong Kong itself have boosted the local currency, Roderick expects those tailwinds to fade. The risk of protests reigniting, or the US dollar catching a bid, would weigh on Hong Kong dollar, he added.

“By mid-February, all of these things are going to be out of the way and I think the fundamentals will come back into play,” Roderick said. “Given where we are, I’ve tactically gone long dollar here just because it makes sense.”

While the Hong Kong dollar is currently flirting with the stronger end of its allowed trading range, it tested the weaker end of the band multiple times in 2019. The episodes prompted investors like Bass to wager on the eventual break of the 36-year old peg.

Roderick says that structural issues in Hong Kong’s monetary system, rather than a forced break, will prompt the city to abandon the peg.