RMB And HK$: The Muddle East

by: Enzio von Pfeil

Both governments can thank only themselves for speculative attacks. Investment implication.

1. Muddle East

So much for the much-touted "Chinese wisdom and pragmatism!" They are just as fallible as we are. Ever since China's gaffe with the circuit breakers in the second week of January, markets have been reeling. China simply cannot be "half pregnant": either she wants a freely-floating currency, or she does not. Her attempt at a dirty float is not proving successful. Step in George Soros! The same can be said of our brethren in Hong Kong. No wonder our "peg" is being attacked. On both sides, policymakers are in a muddle, because they are not staying the course, not sticking to the first principles.

2. RMB

We already have outlined China's policy dilemma: how to support a falling currency and stimulate the economy via more money? Impossible to meet both contradictory objectives.

3. Hong Kong Dollar

We used to have a KISS currency board that self-adjusted via interest rates here in Hong Kong. No more. Crucially, instead of exchanging dollar-for-dollar as under the true peg, our well-heeled Hong Kong Monetary Authority (HKMA) began issuing IOUS. As the South China Morning Post's mercurial Jake van der Kamp penned on 23rd January 2016, p. B1:

"The rules of the game had been substantially changed by this time (i.e. 2007/8), however, allowing the HKMA to engage in manipulation. It bought up the (foreign currency) inflows directly in exchange for various IOU paper totalling HK$1.2 trillion in addition to the HK$350 billion backing of the banknote issue."

Add to this IOU manipulation the horrible vulture descent of circuit breakers in June here on our stock market, and you have a true "bitches brew", the perfect storm.

4. My Guess

The RMB will be allowed an even dirtier float with a downward drift. The HK$ will retain the peg, but with interbank rates strengthening considerably over the next weeks. Watch round two of a peg attack this June when circuit breakers are introduced on our Exchange.

5. Investment Implication

For short-termers (< 1 year's horizon): why waste your energy and money on this policy muddle? The leadership does not know what policy it wants, so how can you get the profits that you want?