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Guest Post: It’s “Heads You Win, Tails You Don’t Lose” With This Currency

Tyler Durden's picture




 

By Tim Staermose Of Sovereign Man

It’s “Heads You Win, Tails You Don’t Lose” With This Currency

One of the most interesting things going on here in Hong Kong at the
moment is the gradual displacement of the US dollar, and even the local
Hong Kong dollar, by the Chinese Yuan.

Walking around town, the signs are obvious:  from shops that gladly
accept Chinese Yuan cash for the goods they sell, to the money changers
which now ALL display the Hong Kong dollar / Chinese Yuan  cross-rate
much more prominently than the US dollar / Hong Kong dollar cross rate.

The Chinese Yuan Rules the Roost e1306409516880 Its heads you win, tails you dont lose with this currency

In many ways, this is a live economic experiment.

Hong Kong has long had one of the world’s freest, most sophisticated
economies; residents are free to choose what currency to accept (and
save), whether HK dollars, US dollars, Chinese Yuan, gold, or anything
else.

Multi-currency bank accounts are the rule rather than the exception
here, and you can switch freely between all of them with a few mouse
clicks, or phone call.  This is one of the reasons why Simon has always
been so keen to recommend banking in Hong Kong.

Yuan-denominated deposits in Hong Kong banks have more than TRIPLED
this year as people look for ways to protect their purchasing power.
Because the Hong Kong Monetary authority pegs its currency to the US
dollar, Hong Kong ends up importing US inflationary monetary.

This is acutely felt.  Since Hong Kong is little more than a barren
rock, nearly EVERYTHING is imported… so prices are rising in accordance
with US dollar inflation.

To guard against this constant loss of purchasing power, many Hong
Kong’s residents are converting their savings to Chinese Yuan. While the
Chinese Yuan closely shadows the US dollar, it has steadily appreciated
and is perceived to have significant future upside should the Chinese
ever allow it to appreciate more quickly.

US monetary inflation makes it inevitable that the Hong Kong Monetary
Authority will come up with some sort of a scheme to either peg the
Hong Kong dollar to the Yuan (rather than the US dollar), or perhaps
even replace the Hong Kong dollar with the Yuan altogether.

This would be a HUGELY popular move. Hong Kong is one of the few
places on Earth with a net savings rate; the loan to deposit ratio its
banking system, for example, stood at 81.7% at the end of March, meaning
there are only 81.7 cents on the dollar lent out in Hong Kong for every
$1 on deposit in the banks.

Consequently, savers would love to see the Hong Kong dollar revalued
higher by pegging it to the Chinese Yuan at the current Yuan/dollar rate
of 6.50, rather than the current HK dollar/US dollar peg of 7.80.

What’s more, a move to re-peg the Hong Kong dollar is anything but
far-fetched when you consider that Hong Kong’s net savers club includes
the government, which is sitting on a HUGE surplus.  So much, in fact,
that the government recently announced it’s handing back HK$6,000
(US$770) to each Hong Kong permanent resident.

Bottom line, the clock is ticking on a Hong Kong dollar revaluation.
The Yuan is a much better cultural and economic fit, and this brings me
to the crux of today’s letter:

If you have significant expenses to meet in US dollars, you may be
uncomfortable taking on currency risk by parking your money in a more
volatile foreign currency such as the Aussie dollar or Canadian dollar.
Let’s face it, they do have periods where they fall significantly versus
the greenback.

By holding savings in Hong Kong dollars, though, you will have
minimal downside risk if the HKMA keep the status quo and maintains the
US dollar peg. Your Hong Kong dollars will always buy the same amount of
US dollars they buy today.

But, you will have a free “call option” in case the Hong Kong dollar
is revalued higher.  It’s a bit like a “heads you win; tails you don’t
lose” situation, and that’s EXACTLY the kind of trade I have dedicated
my professional life to uncovering.

 

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Thu, 05/26/2011 - 12:24 | 1313491 camoes
camoes's picture

Free lunch bitchez!

Thu, 05/26/2011 - 17:53 | 1314587 Number Yuan
Number Yuan's picture

Anyway you look at it, the dollar is teetering on the edge and will soon be toast, and the fall will be rapid.

zai jian, my friends.

Thu, 05/26/2011 - 12:27 | 1313496 LawsofPhysics
LawsofPhysics's picture

Wouldn't you have to make a relatively exact "call" when you write that option in terms of when the hong kong dollar is revalued?  Moreover, what happens when all those Chinese need to start spending? 

Thu, 05/26/2011 - 12:30 | 1313498 camoes
camoes's picture

I'm keeping my cash savings in Singapore Dollars, made a lot of US dollar profits on that, but this maybe a good idea to diversify...

Thu, 05/26/2011 - 12:33 | 1313504 Max Hunter
Max Hunter's picture

newsflash:

“GEITHNER SAYS ‘DARK FORCES’ WORKING AGAINST FINANCIAL REFORM”

 

Indeed Timmy... Indeed..

Thu, 05/26/2011 - 12:31 | 1313510 oogs66
oogs66's picture

comical

Thu, 05/26/2011 - 12:49 | 1313566 tired1
tired1's picture

Denizens of the US/Eu seems like a bunch of turkeys a month before Thanksgiving.

-How's it going?

-Great! Look, more food, let's eat.

Thu, 05/26/2011 - 13:41 | 1313753 Dan The Man
Dan The Man's picture

 

Fuuuunnnnyy !!!

Thu, 05/26/2011 - 16:34 | 1314284 macholatte
macholatte's picture

 Dark forces indeed.....

Racism to blame for Obama's problems

http://www.mcclatchydc.com/2011/05/25/114793/racism-to-blame-for-obamas-problems.html

Fri, 05/27/2011 - 00:59 | 1315596 StychoKiller
StychoKiller's picture

Come Timmy, give yourself to the dark side (we've got cookies!) :>D

Thu, 05/26/2011 - 12:32 | 1313515 Ergo
Ergo's picture

So how does one open an account, and keep it in Renminbi (or HK)?  Is the Renminbi tradeable?

Thu, 05/26/2011 - 12:39 | 1313541 Tracerfan
Tracerfan's picture

Everbank.

Thu, 05/26/2011 - 13:11 | 1313650 NidStyles
NidStyles's picture

Thank you very much for that.

Thu, 05/26/2011 - 12:38 | 1313534 LawsofPhysics
LawsofPhysics's picture

The contrarian take might be that hong kong is simply Detroit, before the AWU showed up.

Thu, 05/26/2011 - 12:39 | 1313540 Jason T
Jason T's picture

I'd rather own the RMB.  http://www.bocusa.com/portal/newsContent?newsId=64&lang=1

For sure... 

 

Thu, 05/26/2011 - 12:45 | 1313563 LawsofPhysics
LawsofPhysics's picture

don't get too excited, read the fine print on exactly when you can access the money and where you can spend it.

Thu, 05/26/2011 - 12:51 | 1313568 williambanzai7
williambanzai7's picture

Thu, 05/26/2011 - 13:07 | 1313619 Henry Chinaski
Henry Chinaski's picture

Bottoms Up

!

Fri, 05/27/2011 - 01:00 | 1315602 StychoKiller
StychoKiller's picture

Such comments could get you a bust in the mouth...:>D

Thu, 05/26/2011 - 13:00 | 1313594 chartcruzer
chartcruzer's picture

Interesting article....  However,,,  as an investment (even a place to park cash),,, take a look at the ETF.  It's settling down a bit,,,,, not my cup of tea yet.

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3225058&cmd=show[s233296448]&disp=P

Ill take Can $

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3225058&cmd=show[s231130698]&disp=P

or Swiss F

http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID3225058&cmd=show[s229780485]&disp=P

for now

 

 

Thu, 05/26/2011 - 13:19 | 1313671 Pseudo Anonym
Pseudo Anonym's picture

as an investment (even a place to park cash)

if I were to park cash in any other vehicle than silver/gold, I would park it here:

https://mtgox.com/

charts:

http://bitcoincharts.com/markets/

bitcoins:

http://en.wikipedia.org/wiki/Bitcoin

Thu, 05/26/2011 - 17:39 | 1314538 BrianZeroHedge
BrianZeroHedge's picture

Bitcoins are an interesting experiment, but there are risks.

1. If you park more than 10k and attempt to make a trade, you will likely move the market by 10% (see bid/ask chart on https://mtgox.com/trade/history)

2. Getting your money out isn't trivial. It's a multi-step process if you want cash.

3. Fees will be over 5% of the transaction.

That said, the currency has risen from USD$0.06/bitcoin to USD$9.00/bitcoin in 9 months, or an increase of 14,900%.

Thu, 05/26/2011 - 18:32 | 1314713 Pseudo Anonym
Pseudo Anonym's picture

the greatest risk is bankers ordering gov't to make bitcoins "illegal" in the long term.  However,  should fiat go hyper soon,  bitcoins will be a way to trade online with deflationary (appreciating) currency - a mirror image of inflationary (depreciating) fiat.

Thu, 05/26/2011 - 19:35 | 1314879 destraht
destraht's picture

Competiting currencies of all types.  Yay!

Thu, 05/26/2011 - 13:03 | 1313616 Henry Chinaski
Henry Chinaski's picture

OT sort of...  Here is a fascinating article about gold farming in China; that is trading virtual gold for actual currency. 

http://www.pcmag.com/article2/0,2817,2385930,00.asp

some interesting parallels... monetary system debt slavery  corruption

 

Thu, 05/26/2011 - 13:10 | 1313645 Mountainview
Mountainview's picture

How can I open and account!?!

Thu, 05/26/2011 - 13:23 | 1313675 Saxxon
Saxxon's picture

Last time we were in Beijing I glided into a Bank of China branch in Wanfujing and opened a Yuan account, using my passport and a small stack of red Maos.  Nothing else necessary.  My mother-in-law keeps the (1970's era) passbook.  I plan to make good use of it.

Americans are locked down into the USD whereas mainland Chinese (not just HK) have had multiple currency options for decades.

Oh yes; and my wife's family had a solar water heater in the 1980s.

The vast majority of Americans will never know how played they are.  That's because they don't travel, don't do independent research and are conditioned to depend on a host of Authorities to tell them what to do.  And waiting to be told what to do next is the passive end of fascism.

 

Thu, 05/26/2011 - 15:21 | 1314004 disabledvet
disabledvet's picture

i thought you were a Saxon?  what happened to your Swiss Francs Saxon dog?  Renminbi for mom?  HAHAHAHAHAHA.   Obviously this article is ridiculous.  They DO indeed trade currencies in Hong Kong!  Do they "trade gold however"?  What was that?  "Not with that worthless HKDollar" you say?  In which case "we'll start our own variant of the CME then!"  I say "excellent choice!"  I'm glad "ours comes with rail lines attached."  I wonder who came up with that idea?  Something tells me "the Canadians were one reason."

Thu, 05/26/2011 - 13:26 | 1313696 Mercury
Mercury's picture

Good work Sovereign Man!

Thu, 05/26/2011 - 13:42 | 1313722 Justaman
Justaman's picture

I have an app ready to open a HK$ savings account in a HK-based international bank without visiting there.  The only hesitancy I have had is the $200 processing fee.  The minimum amount without ongoing fees is like US$1,300.  The $200 is chump change in the grand scheme of things but $200 nonetheless.  This article is leaning me to pulling the trigger. 

Anyone else researching countries to open bank accounts in without needing to travel? 

Isn't Everbank still a US bank with the potential to hold different currencies?  I could be wrong. 

 

Thu, 05/26/2011 - 13:46 | 1313763 topcallingtroll
topcallingtroll's picture

You have inspired me to do my first fx

These markets that dont.float are the perfect place for a speculation because they are easier to frontrun, and political decisions are less complicated to assess than complex market phenomena.

Thu, 05/26/2011 - 14:39 | 1313909 PulauHantu29
PulauHantu29's picture

 

How dare they!

....so when do we invade HK?

Thu, 05/26/2011 - 15:18 | 1313995 Atlantis Consigliore
Atlantis Consigliore's picture

Questions:  in establishing an offshore account you have to declare it here, but keep income offshore.

If you leave the gains there you declare it,but only pay the taxes on ltcg or int on that tax rate?

In hong kong the currency rate dividends or interest tax rate is -0-:? 

and No cap gains tax?

so a revalu of HK/$ / to Yuan would be tax free?

 

Singapore corp tax rate is 12%;

Capital gains tax also -0-

By comparison I think C$ pro business conservative govt corp tax rate is 15% but the loonie is at 105 already.  

Hong Kong could be a good play on a reval to

Yuan,...6.00 range eventually vs US,

5:50  Yuan/$  in 5 years...

the play wont be stocks /emerging markets, it will be currency deval/ revaluations  as EU collapses and Yuan/Deutschemark/Swiss/ Gold Standard... emerges.

 

Thu, 05/26/2011 - 16:46 | 1314316 UncleFurker
UncleFurker's picture

I like standing outside Chow Sang Sang and Chow Tai Fook stores on Nathan Road and drooling on my shoes.

http://2.bp.blogspot.com/_EMGSKhJOkEw/S9k3yxAPNbI/AAAAAAAAEsY/7mq8mQ1nTe...

If you're stopping over at Hong Kong Airport, locate the Chow Sang Sang store in the departure area, and buy a 50 or 100g gold slab. Better prices than the Chow Tai Fook store there, and nicer product IMHO.

 

Fri, 05/27/2011 - 02:56 | 1315684 e-recep
e-recep's picture

So how can the HKMA maintain its passion and honesty to work for the good of the people while the FED rots thoroughly and reeks? Is it the culture?

Fri, 05/27/2011 - 04:50 | 1315728 XPolemic
XPolemic's picture

10 cent spread on USD????!!!! 80c spread on AUD???!!! Maybe you should walk to the back of ChungKing Mansions for your FX.

Apart from your inability to find a good CCY dealer, good article.

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