Bill Ackman, billionaire founder of hedge fund Pershing Square Holdings Ltd., wrote on Twitter Nov. 24, “By holding put options, we have a large nominal short position on the Hong Kong dollar.” He said that the linked exchange rate system no longer makes sense for Hong Kong. It is just a matter of time before the Hong Kong dollar decouples from the U.S. dollar for good.
Ackman also said in the post, “Given the continuous decoupling of China and the United States in recent years, we find it particularly surprising and embarrassing that China continues to peg the Hong Kong dollar to the U.S. dollar.” His tweet also mentioned Richard Cookson’s special report on Bloomberg, which discussed the pressure on Hong Kong because of it was pegged to the U.S. currency.
This is a very thoughtful piece and I agree. We have a large notional short position against the Hong Kong dollar through the ownership of put options. The peg no longer makes sense for Hong Kong and it is only a matter of time before it breaks. https://t.co/efp62TuB03— Bill Ackman (@BillAckman) November 24, 2022
His tweet attracted widespread attention from both inside and outside financial circles.
Accordingly, the Hong Kong Monetary Authority (HKMA) responded by saying that Hong Kong neither needs nor intends to change the linked exchange rate system. After nearly 40 years in operation, the linked exchange rate system has worked well in the face of massive capital flows. Regarding doubts from time to time raised by individual market players about the linked exchange rate system, most of them are based on misunderstandings of the system, or based primarily on their own fund positions, the HKMA does not make comment on such personal views.
Ackman later posted two more tweets to continue his question: “If China is indeed a strong, independent, sovereign state, why does it need to peg the Hong Kong dollar to the U.S. dollar?” He pointed out that until the very last moment before it actually happens, all sovereign states will say they will never do that (decouple).
If China is indeed a strong, independent sovereign, why does it need to peg its currency and that of Hong Kong’s to the US dollar?— Bill Ackman (@BillAckman) November 24, 2022
The linked exchange rate system has been implemented in Hong Kong since October 1983. The Hong Kong Monetary Authority is responsible for keeping the local currency within a range of 7.75 to 7.85 HK dollar to that of the United States.
The U.S. Federal Reserve started its current rate hike cycle at the beginning of 2022, and due to the continued weakness of the Hong Kong dollar it hit the weak-side convertibility guarantee repeatedly.
According to the Linked Exchange Mechanism, the HKMA has undertaken 41 Hong Kong dollar sell orders since May 12, totalling HK$242.082 billion (about $31 billion). Liquidity has thus shrunk by more than 70 percent in six months, based on the aggregate balance of the banking system of around HK$337 billion (about $43 billion) in mid-May.