Hong Kong to keep currency peg to US dollar, says Tsang

William Ackman, founder of hedge fund Pershing Square Capital Management LP, will “lose a lot of money” on his bet that Hong Kong will amend its currency peg to the dollar, city Chief Executive Donald Tsang said.

Ackman, who netted more than $1 billion on a six-year short bet against the bond insurer MBIA Inc., said in September that he is buying Hong Kong dollar call options. The wagers will make money if Hong Kong changes its three-decade long linkage to the U.S. dollar and allows the currency to rise or if option prices increase before maturity.

“I think he’s going to lose a lot of money on that,” Tsang, 67, said in a Bloomberg Television interview in New York yesterday. The peg is a “very important anchor underpinning Hong Kong growth and Hong Kong’s monetary stability and we are not going to change,” he said. Tsang fended off a speculative attack to weaken the Hong Kong dollar and break the peg when he was finance secretary during the Asian financial crisis in 1998, a policy that involved $15 billion of stock purchases and proved profitable for the city.

Policy makers have kept the currency at about HK$7.80 per dollar since 1983, linking monetary policy to the U.S. Federal Reserve’s. The city’s consumer prices rose 7.9 percent in July, the fastest pace since 1995, partly because the peg deprives the Hong Kong Monetary Authority the option to raise borrowing costs when the Fed keeps benchmark rates near zero. .

“For a small place like Hong Kong, if there’s political will to keep the peg, they can probably do it,” said Axel Merk, who holds Hong Kong dollars for his funds at Merk Investments LLC in Paolo Alto, California. “If they say: ‘we’ll keep it,’ That’s the end of that. For the time being, I don’t see any tension in that market.”

Hong Kong needs the peg because its role as a global trade intermediary requires a stable exchange rate, Tsang said.

“We have seen good times and very bad times, but Hong Kong stuck with it,” said Tsang. “We believe it’s going to inspire confidence in the market.”

Ackman, 45, said in September that the easiest way for Hong Kong to allow the currency to appreciate would be to change the peg to HK$6 versus per U.S. dollar and then link to the Chinese yuan over three to six years. If it’s successful, it will be the hedge fund’s “most profitable” trade, he said at a conference in New York.

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