Hedge Funds: The Empire Strikes Back At HKD Short-Sellers and Doomsayers

January 17, 2020 | Hedge Funds, News
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The HKMA came out swinging against prophets of a crisis in Hong Kong.

Such is the power of Kyle Bass, the hedge fund manager who correctly predicted the crisis from US subprime mortgages in 2007. The Hong Kong Monetary Authority deemed it appropriate to hold a press conference to debunk the latest doom-and-gloom prediction from Bass – that Hong Kong is on the brink of a “full-fledged banking crisis” in 2020. Bass is short the Hong Kong dollar.

HKMA calls a press conference

“Hong Kong’s banking sector is among the safest worldwide,” said the HKMA’s Deputy Chief Executive Arthur Yuen, during a press conference. “The data shows that Hong Kong’s banking sector is profitable and solid, even amid the challenging operating environment and the social unrest during the past seven months.”

He said the capital adequacy ratio of Hong Kong’s banks stood at 20.9% last year. This was among the highest capital adequacies in the world. Currency deposits went up 2.9% while bad loans fell to 0.56%, also among the lowest in the world.

“For someone to describe the safest banking sector in the world [as facing] a crisis is just groundless, and is not based on real data and figures,” said Yuen.

Hong Kong in the same boat as Iceland and Ireland

Bass also likened Hong Kong’s situation to Iceland and Ireland, both countries where the banking systems succumbed to the global crisis. He said the collapse of the local economy and the high levels of leverage could lead to a banking meltdown.

Trium: another short view on the Hong Kong Dollar

Meanwhile, another hedge fund, London-based Trium Capital, has shorted the Hong Kong dollar after the currency lifted off the lows from the months-long protests in the city. Trium’s Thomas Roderick saw the recent rally in the Hong Kong dollar as an opportunity to short the currency. In his view, recent short-term bullish factors working in favor of the currency were only temporary. He, therefore, expects the HKD to fall back towards its lows around $7.85 once protests flare again, or if the US dollar strengthens.

IPOs are pushing it on the HK stock exchange

The doom-and-gloom scenarios are getting short shrift on the local bourse, meanwhile. Thursday was a ‘magnificent seven’ moment as the stock exchange had its busiest listing day in 18 months. Seven companies made their listing debuts, and this was the most since eight companies began trading on July 12, 2018.

“Twenty-two IPOs in two weeks and seven listings in a single one day, these are magnificent statistics” given the political and economic circumstances, said Edmond Hui, chief executive of Bright Smart Securities. “It shows the strength of the Hong Kong capital market.”

Meanwhile, the Hang Seng Index continues its upward trajectory in a channel. The index stumbled from trade wars and the HK protests, but never really broke its long-term uptrend as seen below. Also, it is now lifting off in the direction of the upper trendline without touching the lower line. That could portend further bullishness.

The Hong Kong dollar continues its rally, having breezed past several resistances successively. It appears to be heading inexorably towards the $7.75 level, a long-term resistance.

In latest trading, bulls quickly bought into weakness in the currency, and it closed near the high of the day.

On balance, it appears that there is little risk of a banking implosion. However, the currency may revert from the $7.75 level and fall if protests flare up around that time.

Related Story:  The DailyAlts Playbook: Short Strategies for Tesla and Apple, where Ken Griffin was on Wednesday, Kyle Bass’ Hong Kong Worries, and the GAO’s Statement on Donald Trump

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