Hong Kong tells currency bears to watch out for mega IPOs as Kyle Bass capitalises on slump to tweet peg’s demise

Hong Kong’s currency weakened to a one-year-low of about 7.77 per US dollar on March 8 as local stocks slumped from February’s peak
Mega IPOs to be a magnet for capital inflows, just like in 2020 when US$50 billion entered the city and forced the biggest intervention since 2009: HKMA

HKMA

Enoch Yiu

Published: 7:00am, 15 Mar 2021

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The Hong Kong Monetary Authority said the local currency’s weakness in recent weeks is a blip as sentiment on markets soured. Several large stock offerings could spur capital inflows and reverse the mini-slump.

That’s the message from Eddie Yue Wai-man, chief executive of the local de facto central bank, to currency peg doubters as the Hong Kong dollar lost 0.15 per cent against the greenback over the past three months, accelerating when the benchmark Hang Seng Index tumbled from its February 17 peak.

It’s an indirect response to Dallas-based hedge fund manager Kyle Bass, founder of Hayman Capital Management, who is tweeting about further capital outflows and the demise of the city’s 37-year-old linked exchange rate system.

“The Hong Kong dollar may be weakened for a while due to market sentiment issues,” Yue told local media in a briefing last week. “However, there are many upcoming IPOs such as Baidu and the homecoming of other US-listed mainland technology giants. The wave of mega IPOs will have a positive impact on capital inflows and will support the local currency this year.”

The local dollar weakened to 7.77 per dollar on March 8, according to Bloomberg data, a level not seen since March 13 last year. While the benchmark Hang Seng Index only fell by 7.5 per cent, technology bellwethers that powered bullish tones at the turn of the new year have corrected even more into bear-market territory with a 22 per cent retreat from their record-highs.

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The Hong Kong dollar has been pegged to the US currency since 1983. The HKMA is obliged to intervene when the currency moves outside its trading band of 7.75 to 7.85 per dollar.

Bass isn’t only watching the market actions. He tweeted last week about ongoing strife in the city’s political space, highlighting tightening sanctions and a reassessment of Hong Kong’s position as a financial hub.

Still, the Hong Kong dollar has withstood harsher conditions throughout the past 24 months, not the least from Bass himself who in June initiated a fund wagering 2oo-to-1 on the peg demise, according to Bloomberg. The local currency appreciated 0.52 per cent in 2019 and 0.49 per cent in 2020, trading at the strong end of its band most of the time since March last year before the current dip.

Yue credited its resilience to some US$50 billion of capital inflows last year as investors chased red-hot stock debutants such as Nongfu Spring and JD.com. The HKMA spent HK$383.5 billion (US$49.4 billion) in 85 interventions to weaken its own currency, the highest since HK$463.4 billion in 2009 post the global financial crisis. The Exchange Fund, its war chest, stood at HK$4.5 trillion at the end of January.

Kuaishou Technology, this year’s hottest IPO, was also a magnet for fund inflows, while its rival short-video app operator Bilibili is said to have been approved for a US$3 billion offering while Baidu is seeking US$3.6 billion.

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What is the Hong Kong Dollar Peg?

Yue, who joined the HKMA at its inception in 1993 and assumed the top post in October 2019, said much of last year’s inflows have remained in the city, dispelling concerns of capital leakage to Singapore or other rival financial hubs.

The aggregate balance, or the amount of cash sloshing in the banking system, stood at a record HK$457.46 billion since October. That is more than eight times the level before the HKMA’s currency-market intervention began in April last year.

Reflecting on his promotion to the top job, the 54-year-old Yue said it was a nervous and challenging time as it coincided with rumours of a bank run.

“The lesson I have learned from the first week is that the HKMA has to use social media to address the public. This is the new way to address bank run rumours nowadays. This is very different from the old days when some heavyweight leaders were needed to help restore confidence.”

Since then, he and his team have used social media platforms to crack down on rumours and issue clarifications to protect public confidence in the banking system. Whether the HKMA will spar with Bass and his ilk in future remains to be seen.