William Ackman, founder of hedge fund Pershing Square Capital Management LP, will “lose a lot of money” on his bet that Hong Kong will amend its currency peg to the dollar, city Chief Executive Donald Tsang said.
Ackman, who netted more than $1 billion on a six-year short bet against the bond insurer MBIA Inc., said in September that he is buying Hong Kong dollar call options. The wagers will make money if Hong Kong changes its three-decade long linkage to the U.S. dollar and allows the currency to rise or if option prices increase before maturity.
“I think he’s going to lose a lot of money on that,” Tsang, 67, said in a Bloomberg Television interview in New York yesterday. The peg is a “very important anchor underpinning Hong Kong growth and Hong Kong’s monetary stability and we are not going to change,” he said. Tsang fended off a speculative attack to weaken the Hong Kong dollar and break the peg when he was finance secretary during the Asian financial crisis in 1998, a policy that involved $15 billion of stock purchases and proved profitable for the city.
Policy makers have kept the currency at about HK$7.80 per dollar since 1983, linking monetary policy to the U.S. Federal Reserve’s. The city’s consumer prices rose 7.9 percent in July, the fastest pace since 1995, partly because the peg deprives the Hong Kong Monetary Authority the option to raise borrowing costs when the Fed keeps benchmark rates near zero. In 2005, the Hong Kong Monetary Authority committed to limiting the currency’s decline to HK$7.85 per dollar and capping gains at HK$7.75.
Stable Rate Goal
“For a small place like Hong Kong, if there’s political will to keep the peg, they can probably do it,” said Axel Merk, who holds Hong Kong dollars for his funds at Merk Investments LLC in Paolo Alto, California. “If they say: ‘we’ll keep it,’ That’s the end of that. For the time being, I don’t see any tension in that market.”
Stephen Sigmund, a spokesman for Pershing Square, declined to comment.
A buyer of call options pays the premium for the contract that gives the investor the right, not the obligation, to purchase the currency at a set price in the future. The investor loses the premium should the currency fail to rise above the agreed upon rates, known as the strike price, at maturity.
Hong Kong needs the peg, which survived the Asian financial crisis in the late 1990s and the global recession three years ago, because the city’s role as a global trade intermediary requires a stable exchange rate, Tsang said.
“We have seen good times and very bad times, but Hong Kong stuck with it,” said Tsang, who will step down as chief executive in June. “We believe it’s going to inspire confidence.”
HSBC Holdings Plc., which owns two of the city’s three biggest banks, expects Hong Kong to keep the peg as the arrangement brings stability to its economy, Paul Mackel, the lender’s head of Asian currency research, said at the Bloomberg Link China Conference in Hong Kong on Oct. 25.
The Hong Kong dollar was little changed at 7.7724 per dollar as of 9:32 a.m. New York time.
The yuan has gained 24 percent against the dollar in the past five years, making the city’s imports from China more expensive. The link will last at least until the yuan becomes fully convertible, “which won’t be tomorrow,” Tsang said in an earlier event in New York on Nov. 7. Hong Kong imported about 45 percent of its food and goods from China in 2011, according to the city’s statistics department.
Hong Kong expects yuan deposits in the city to rise to more than 1 trillion yuan by the end of this year, Financial Secretary John Tsang said in Los Angeles, according to a transcript posted on the government’s website yesterday.
Yuan-denominated savings in Hong Kong may have recorded a “sizable decline” last month on weaker investor demand for the currency, HSBC said in a report on Nov. 2. Deposits in the Chinese currency rose 13.2 billion yuan ($2.1 billion) in September to 622.2 billion yuan, Hong Kong Monetary Authority data show. This year’s average monthly increase is 34.1 billion yuan, and the deposits last fell in October 2009.
Implied volatility on five-year Hong Kong dollar options, which is one of ingredients for option prices, increased to 7.5 percent today, from 5 percent in July, according to data compiled by Bloomberg. The gauge jumped to 16.8 percent in March 2010, the highest level since at least 2006.
Ackman, 45, said in September that the easiest way for Hong Kong to allow the currency to appreciate would be to change the peg to HK$6 versus per U.S. dollar and then link to the Chinese yuan over three to six years. If it’s successful, it will be the hedge fund’s “most profitable” trade, he said at a conference in New York.
Ackman bought credit-default swaps betting that MBIA’s credit would deteriorate and wrote a 66-page report on the company’s problems in 2002. Shares of Armonk, New York-based MBIA, the world’s largest bond insurer, tumbled 91 percent in six years through the end of 2008. A short position profits when the price of an asset declines.