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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Stitch who wrote (5402)	8/7/1998 3:50:00 AM
From: tom	Read Replies (1) \| Respond to of 9980

At the moment the HK$ is completely interchangeable with the US$. The HKMA will exchange them at a fixed rate. This system works as long as not every HK$ deposit holder panics and wants to exchange HK$ for US$ at the same time. Although the actual monetary base (notes and coins in circulation) is more than 100% backed by foreign reserves the broader measures of money supply (ie deposits etc) are not completely covered. This means that if every HK$ deposit holder goes to the HKMA and asks to convert their HK$ savings into US$, the HKMA would run out of foreign exchange. The mechanism to stop this from happening is interest rates. They rise when the pool of HK$ decreases in order to attract people back to HK$ deposits. As long as the HKMA doesn't interfere this should work 99.9% of the time. For every scared HK$ deposit holder there is one high yield investor who will buy HK$ at a price. A small problemette if that if people are convinced that the HK$ is going to devalue then they will not hold HK$ at any price and in fact they might feel that the very high interest rates are a sign that the HK$ is about to devalue. Of course any sign at all of a lack of commitment to the HK$/RMB on the part of the Chinese or Hong Kong government will also add to the fun. If investors think that the Hong Kong government cannot stand the pain that the peg inflicts then they will punish that weakness. Anyway this is where the IMF come in. As people might be scared that the HKMA does not have enough foreign exchange to convert everyones HK$ then the IMF could announce a standby facility of US$10-20bn that the HKMA could draw on to fund HK$ deposit withdrawals. If all went to plan then they would never actually need that money as not everyone would convert their HK$ but it would make people feel warm and safe. However, if everyone did convert their money then you would effectively dollarise the economy and the HK$ would cease to exist. If the Chinese came out and said they were happy with this solution then speculators might get bored and go away.