John Tsang Chun-wah’s budget U-turn has had an unexpected effect. The financial secretary’s flip-flop caught the eye of international currency speculators. They scent an opportunity. Tsang was besieged with demands to hand out some of the Hong Kong Government’s huge pile of excess reserves to the people. He proposed to inject HK$6,000 into everybody’s Mandatory Provident Fund account. The offer sparked instant outrage. Assailed on all sides, Tsang surrendered. Just a week after his budget speech, he changed his mind and announced he would in fact dole out HK$6,000 to every Hong Kong permanent resident in cold hard cash.
If Hong Kong officials crack so easily, maybe they are not such a tough nut to crack after all. Perhaps under pressure, Tsang wold prove no more resolute in defence of the Hong Kong dollar peg than he proved in defence of his budget. We should have a punt.
The Hong Kong dollar is now the most undervalued currency on the planet. Speculators have started buying Hong Kong dollars in the foreign exchange market. They reason that sooner or later the relative undervaluation of the currency is likely to attract fresh inflows of capital into Hong Kong, causing a new round of property price rises and driving consumers inflation up to painful levels.
They think that if inflation were to climb towards 10%, the government would find itself coming under intense popular pressure to abandon the US dollar peg, with politicians of all stripes calling on the financial secretary to revalue the currency and hitch it to the yuan in a bid to quell rising prices.
For the speculators, buying Hong Kong dollars is a bottom-drawer trade: one to put in place and forget about it. The position is cheap to fund and currency is extremely unlikely to fall.