Hong Kong Mistaken in Backing Dollar Peg By Henry C K Liu Efforts by the Hong Kong Monetary Authority to hold down the value of the local currency compared with the US dollar, backed by the injection of almost US$14 billion since October 19, are doomed to fail - and hedge-fund investor William Ackman is placed to get rich. Increasing amounts Chinese currency, the yuan, flowing into the city are putting pressure on the peg linking the HK dollar to the US currency. The peg has been in place since 1983, and since 2005 limits the currency's movement to between HK$7.85 and an upper limit of HK$7.75 to the US dollar. Ackman, the founder of New York-based Pershing Square Capital Management LP said on October 20 he was keeping his call contracts on the Hong Kong dollar and suggested it be revalued 30% higher, according to a Bloomberg report on January 14. Ackman's cash-backed views were dismissed this week, Bloomberg reported, by K C Chan, the city's secretary for financial services and the treasury. "There is no question about the peg at all. He will be disappointed. I don't expect him to realize his bet," Chan said in an interview with Bloomberg, in a renewal of his pledge to local legislators last October, when according to the South Morning Post he told legislators: "We have no plans to change the Hong Kong dollar peg." It is a view shared by all but one of the 20 analysts polled by Bloomberg in November, the news outlet reporting then that the bulk of analysts expected the fixed exchange-rate system to last for at least five more years. The market is on Ackman's side. The HK dollar will have to be pegged to the yuan as a matter of time, which means it must depeg and rise against the US dollar. The HK Monetary Authority will only be throwing good money after bad, not just temporarily, but on a permanent track. It may have the deep pocket to out bet Ackman, but not the market because the cost of defending the HK dollar's peg to the US dollar will exceed its benefit soon, even if the HKMA has the HK dollars to keep buying US dollar at market rate. As the US dollar falls against the yuan, the HK dollar, pegged to the US dollar, will lose purchasing power in China. That is a huge penalty that cannot be neutralized by the peg. HK trade with China has already overtaken HK trade with the US, making the currency peg to the US dollar irrational. This trend will continue; the only volatility will be the pace, not the direction. The HKMA is falling into a trap of buying a fiat currency with long-term downward valuation - not a smart move if the loss cannot be neutralized with trade benefits. If Ackman can sustain his bet, he will make a pile of money at Hong Kong's expense.