Tag Archives: Kelvin Wong

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.


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Hong Kong and deflation

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The Hong Kong currency board arrangement means net Hong Kong financial assets (AKA money supply) can grow only via net exports (and/or external debt).

This means market forces work to sustain net exports ‘at any cost’.

The usual result is a deflationary mess, until ‘competitiveness’ is achieved to the extent net exports are sufficient for funding the domestic desire for net financial assets.

See ‘Exchange rate policy and full employment’ at www.mosler.org for more details of this process.

Yes, the monetary authority can intervene and give up its reserves to a ‘savings hungry’ domestic market, but at the risk of quickly running out of reserves needed to facilitate convertibility of Hong Kong dollars on demand.

Best I can tell, currency boards were originally instruments of colonial exploitation, designed to force net exports to the mother country.

Today, that’s an enormous price to pay for ‘currency stability’.

Hong Kong Home Sales Post Biggest Drop Since 1999

By Kelvin Wong and Nipa Piboontanasawat

Nov. 4 (Bloomberg) — Hong Kong’s home sales posted the biggest drop by volume in almost nine years, as local lenders tightened mortgage lending amid a slowdown in the economy.

The number of residential units that changed hands in the city last month slumped 58.1 percent to 4,719, according to a Land Registry statement today. That’s the largest drop since November 1999 and the fourth straight month of declines.

By value, sales of residential units dropped 63 percent from a year earlier to HK$16.3 billion ($2.1 billion).

The economic outlook, coupled with declines in the Hong Kong stock market, have curbed demand for real estate and led potential buyers to expect cheaper prices. The Hang Seng Index has dropped 48 percent this year.

Home prices on Hong Kong island, which houses some of the world’s most expensive apartments, had their biggest weekly drop in the week ended Oct. 19, according to figures compiled by Centaline Property Agency Ltd.


“We’ll probably see even worse figures for the following month,” said Wong Leung-sing, an associate director of research at Centaline. “Then things should improve slightly as many
people may try to buy at low prices.”

Hong Kong’s bank lending rose 13 percent in September, the slowest pace in 13 months, and almost half the 24 percent increase in August.


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Bloomberg: Bank run in HK

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This happens all the time with fixed exchange rates and currency boards.

The only way for banks to get ‘real’ (convertible) $HK for their depositors is to buy them from the monetary authority with $US. That usually means banks have to borrow $US to meet withdrawals of $HK, and most banks won’t have $US lines of more than a relatively small percentage of their deposits. With a strict currency board arrangement the monetary authority isn’t allowed to lend (convertible) $HK or its $US reserves, though in HK they sometimes do. But even those reserves are finite, and way smaller than total bank liabilities.

Historically the result has been a deflationary mess, with GDP dropping double digits, high unemployment, bank failures, and collapsing property and other asset prices.

At the macro level, the only way the island can get the $US it needs to buy $HK from the monetary authority is to net export (or sell assets for $US). The value of the $HK can’t go down (the monetary authority has more than enough $US reserves to buy back all the real $HK it’s sold), so the way costs of production go down is via local deflation due to the collapse in aggregate demand until prices are low enough to drive the needed exports.

Hopefully nothing comes of it this time around. But it hasn’t been that kind of year…

Hong Kong Savers Fret as Bank East Asia Fights Rumors

by Kelvin Wong and Theresa Tang

Sept. 25 (Bloomberg) For the first time since the Asian financial crisis more than a decade ago, Hong Kong has faced a bank run.

Hundreds of depositors lined up at the city’s third-largest lender Bank of East Asia Ltd. yesterday as the bank hit out at “malicious rumors,” and Chairman David Li rushed back to Hong Kong from the U.S. to reassure clients and investors. The city’s central bank jumped to BEA’s defense and police said they’re investigating phone text messages questioning its health.


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