It has become too expensive to short sell in present-day Hong Kong financial markets.
The Hong Stock and Futures markets are much larger today than it was 2 decades ago. It is no longer possible for the short sellers to do a successful attack in its markets, as reported by South China Morning Post. They would require more funds and resources than they can actually make money out of, said Norman Chan Tak-lam, chief executive of the Hong Kong Monetary Authority.
The government was forced in 1998 to remove the currency’s peg to the USD. This was the direct result of the attack on the stocks, futures and currency markets by the short sellers. The interest rates were forced to move up and there was the bearish sentiment in the stocks and futures markets.
“There has been some normal short sell position, but the size is not substantial. We have not seen big short sell positions opening in the Hong Kong dollar recently,” Chan said post the Treasury Markets Association’s annual summit on Monday.
“As such, the public does not need to worry about the short sellers’ attack to the peg as they would not be able to repeat what the short sellers were doing during the Asian financial crisis,” Chan added.
The local currency has been linked to the US dollar since 1983. It has provided the region with economic stability. The peg has been loosened up to allow it trade between a band of 7.75 and 7.85.
The currency speculators affected the fixed rate by selling stocks, index futures and Hong Kong Dollars in currency markets. This was the reason for the sharp rise in interest rates during the Asian financial crisis. The HIBOR(Hong Kong Inter-Bank Offer Rate) drove up to about 20 per cent and the government injected money into the exchange fund to buy blue-chip shares.
Hedge Fund Managers like Hayman Capital Management’s Kyle Bass, Crescat Capital’s Kevin Smith and Trium Capital’s Thomas Roderick, have predicted that a major capital flight from the city will force the monetary authority to drop the HK Dollar-USD peg. This they said will be due to the negative sentiment about the protests currently happening in Hong Kong.
The exchange fund’s reserves stood at HK$4.138 trillion (US$528.73 billion) at the end of July this year. These numbers are 4.5 times more than those at the end of 1998.
The Hang Seng Index dropped about 5 per cent from June to the end of August.
But it has been on a tear of late, rising 6.3 per cent in the first two weeks of this month, largely due to improved sentiment on trade and a move by city chief Carrie Lam Cheng Yuet-Ngor to give in to one protester demand and formally withdraw a highly unpopular extradition bill that originally sparked the demonstrations.
The Hang Seng Index gained back 6.3% this month, as compared to a drop of 5% in August end. This was due to the recent withdrawal of the extradition bill, as announced by the Hong Kong Chief.
Whereas, the HSI had dropped more than 50 per cent during the Asian financial crisis before a step in by the government.
“We have not seen any major capital outflow in recent months. There are some clients asking about opening accounts overseas, but the private banks have not seen clients ask to transfer a massive amount of money out of Hong Kong. The local deposit numbers are holding up well,” Chan said.
He also pointed out that the Hong Kong dollar has strengthened against the US dollar in recent days as the improved market sentiment has led some mega initial public offerings to resume in Hong Kong.
He added that the local currency has recently strengthened. This has been due to IPOs(Logistic giant ESR Cayman and brewery company Budweiser), that have been resumed in the city’s exchange over-improved sentiments in the city.
The protests have pushed property prices down about 3 per cent. But Chan said that it is too soon to relax mortgage policies that are intended to cool down overheating in the property market.
The property prices have fallen down by 3% due to the protests. Chan reacted to this by saying, it is still too early to loosen the policies for mortgage. They help in cooling down the overheating in the property market.
“We will closely monitor the market. Only if we confirm there is a downward cycle of the property market would we will relax the mortgage policies,” Chan added.
Hong Kong’s credit rating has been downgraded by Fitch due to political unrest.
“We do not see there would be a big impact on the cost of funding,” Chan said, “Hong Kong remains an international borrowing hub for companies. We would like to see the social order to return to normal.”