Hong Kong currency board reserves at risk

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Hong Kong’s currency board arrangement requires net exports to fund domestic net financial assets (‘money supply’) needs that other nations get ‘free’ from their deficit spending.

Net Hong Kong dollars can be had only by buying them from the monetary authority with USD, etc.

With exports markets collapsing, the direct result for Hong Kong is a deflation of costs of exports that doesn’t stop until exports resume at levels sufficient to fund the domestic need for net financial assets.

Bank deposits can not be insured by the monetary authority without threatening the solvency of the monetary authority as bank deposits necessarily exceed monetary authority reserves.

So, the move to guarantee deposits is only a temporary fix limited by the reserves of the monetary authority.

A currency board advocate would oppose insuring bank deposits and would let the currency board arrangement work itself out via the deflation route.

While theoretically correct, the deflation process is politically unacceptable as it drives real wages towards zero in a process that ends only when exports resume.

Hong Kong’s attachment to its currency board system that makes it fully dependent on net exports just to fund itself means it will continue to be hit particularly hard by the collapse in export markets.

Best I can tell the currency board arrangement was designed by England to force net exports from its colonies.

Bank of East Asia Posts First Loss in Four Decades

by Kelvin Wong

Feb 17 (Bloomberg) — Bank of East Asia Ltd., the Hong Kong lender that suffered a run on deposits in September, had its first loss in at least four decades after writing down the value of credit-market investments.

The HK$855 million ($110 million) deficit for the six months ended Dec. 31, derived by subtracting first-half earnings from full-year numbers reported by the company today, compares with profit of HK$2.26 billion a year earlier.

Chairman David Li said he’ll “fast track” measures to cut costs after expenses rose 23 percent last year and bad-loan charges more than doubled. Bank of East Asia’s shares tumbled 61 percent in the past year, and the September run on the lender spurred Hong Kong’s central bank to guarantee all bank deposits.