November 2, 2012,
Los Angeles, California
For several decades now, the Hong Kong dollar has been ‘pegged’ to the US dollar at 7.80 plus/minus a very narrow band (7.75 to 7.85).
This means that the Hong Kong Monetary Authority has to mirror whatever the US Federal Reserve does. If Bernanke prints, Hong Kong has to print. And as you have probably noticed, Mr. Bernanke has done quite a bit of printing over the past few years. As such, interest rates in Hong Kong are practically zero.
Such monetary policy has been instrumental in driving Hong Kong’s property prices to the moon. It’s absurd– a small hovel in Hong Kong’s central district will easily set you back more than a million dollars.
It doesn’t take a genius to figure out that when banks are handing out mortgages at nearly 0% interest, property prices are going to spike.
As an example, if you can afford a $2,000 monthly payment, that will buy you a $370,000 home when amortized over a 30-year mortgage fixed at 5%. But if the loan terms are changed to ‘interest only’ at just 1%, suddenly that same $2,000 monthly payment affords you a whopping $2.4 million home.
Printing money doesn’t work; if the government sent everyone a check for a million bucks, price levels across the board would go up. It’s happening in Hong Kong, especially in the property market where financing is so readily available.
Hong Kong’s government is desperately trying to cool the property market now; in fact, last Friday they quietly passed a new 15% stamp duty that applies to foreigners buying local property. The new tax took effective almost immediately.
(As you would expect, shares of Hong Kong’s major property development companies tanked when the markets opened on Monday morning. Big time.)
It’s clear that the authorities in Hong Kong are really scared of inflation. Evidence of rising prices is obvious– taxi fares have increased. Food at the grocery store. Drink prices at restaurants. Etc.
Unfortunately, the Hong Kong dollar is at the ‘strong’ end of its band right now. This means that the authorities have no choice but to keep printing… buying US dollars and flooding the market with Hong Kong dollars.
This is only going to push prices up even more. The stamp duty won’t make a difference, like putting a band-aid on a sucking chest wound.
The only REAL solution… and the inevitable one… is for Hong Kong to drop its peg against the US dollar. There are two obvious options:
1) The Hong Kong dollar is re-pegged to a ‘basket’ of currencies; in this instance it will gradually strengthen against the US dollar.
2) The Hong Kong dollar is re-valued with immediate effect to the renminbi. This would be about a 25% gain in US dollar terms, overnight, for anyone holding Hong Kong dollars.
Consequently, if you have obligations in your life that require you to hold US dollars, one solution may be for you to hold Hong Kong dollars instead. For now, the two are completely interchangeable at a fixed rate, so you have zero currency risk.
But by holding Hong Kong dollars, you essentially have free upside to any potential revaluation.
Holding Hong Kong dollars is fairly simple. You can try opening an account at a bank like Everbank in the US, but the best option by far is to have an account in Hong Kong. Anyone can open a bank account there, especially if you’re willing to travel.
If not, I’ve put together this short paper explaining how you can open a Hong Kong bank account remotely.
The authorities in Hong Kong are flat out denying that they will drop the peg… which makes me think even more that it’s a near-certainty.
In fact, just yesterday the authorities had to print nearly $1 BILLION in order to intervene in the currency markets. It’s just not sustainable.
Holding Hong Kong dollars makes sense– it eliminates your currency risk while giving you all the upside of a revaluation… that could potentially come very, very soon.