The Son of Finance of the Great Age

  Chapter 263 How to attack Hong Kong

   In response to this short-selling behavior, the Hong Kong Monetary Authority immediately responded by raising the bank's loan interest rate, forcing the bank to return the excess position, causing currency speculators to close their positions at a higher loan interest rate.

Regarding the short selling behavior of currency speculators (hedge funds), the officials of the Monetary Authority are very clear, nothing more than using their US dollar funds as a guarantee, borrowing the corresponding Hong Kong dollar funds at the loan interest rate, and then selling them in the foreign exchange market, while shorting futures exchange Contracts are generally the same as shorting the Thai baht and ringgit. Therefore, as long as their borrowing costs are increased, and as long as they cannot break the Hong Kong dollar, they can only close their positions and leave the market in the end.

  Hong Kong has foreign exchange reserves of nearly 100 billion U.S. dollars. In the short term, it is not afraid of the phenomenon that the Hong Kong dollar will be hit. It is unnecessary to ignore the short selling behavior of less than 5 billion U.S. dollars. However, after consultation, the officials of the Hong Kong Monetary Authority believe that this momentum of shorting the Hong Kong dollar cannot be encouraged, otherwise the large-scale influx of hedge funds will cause serious problems.

  Seeing the rise in loan interest rates, the hedge funds that have shorted the Hong Kong dollar in the past two days also realized that there may be no results, and closed their positions in the market after paying part of the loan interest.

   False alarm.

  …

But if you really think that this has successfully repelled the impact of hedge funds on the Hong Kong dollar, it is a big mistake. In fact, this is just a test by hedge funds on the Hong Kong dollar. This test is to find the flaws in the Hong Kong currency system. Indeed found it.

   This defect is the interbank lending market.

  Hong Kong's exchange rate system adopts the linked exchange rate system, which is a form of the "currency board system". Specifically, if a certain amount of domestic currency is issued, it must be supported by foreign currency of the same value before it can be issued. That is, if the three note-issuing banks in Hong Kong want to issue Hong Kong dollars, they must pay the corresponding U.S. dollars to the Monetary Authority at the exchange rate of 7.8 Hong Kong dollars to 1 U.S. dollar.

   After HSBC, Standard Chartered and Huayin pay the corresponding U.S. dollars, they can issue Hong Kong dollars. During this process, they will get a certificate of indebtedness, which can also be exchanged for Hong Kong dollars from the Hong Kong Monetary Authority, which is also the price of 7.8 Hong Kong dollars to 1 US dollar.

   It seems that every Hong Kong dollar has a sufficient amount of U.S. dollars as collateral, but this is not the case in reality. Because the currency issued is the base currency, banks multiply deposits and loans through the circulation system, making the total amount of currency in the whole society reach dozens of times, which is the multiplier effect.

  At this time, the total amount of cash circulating in Hong Kong plus various deposits exceeds 1.7 trillion Hong Kong dollars, and the foreign exchange reserves are less than 100 billion U.S. dollars. Therefore, once Hong Kong loses confidence in the Hong Kong dollar and demands that the Hong Kong dollars in their hands be converted into U.S. dollars, the Monetary Authority will not be able to maintain the linked exchange rate system.

  However, it is not an easy thing to make all Hong Kong people lose confidence in the Hong Kong dollar. The only things that can cause this to happen are the sinking of Hong Kong Island, the outbreak of a world war, and the like.

  Although it is unlikely that all Hong Kong people will lose confidence in the Hong Kong dollar, once a large-scale currency attack occurs, there will be major problems in the interbank lending market. This is the fatal flaw of the linked exchange rate system.

Specifically, there is only so much Hong Kong dollar cash circulating in the market, and once there is a large amount of borrowing, in order to maintain the ratio of reserves, each bank must borrow funds through the inter-bank lending market. The lending rate will inevitably increase significantly, and this increase in interest rate is a huge negative for the stock market.

  For example, the entire society has 1 trillion base currency (let’s count it as cash), and the total reserve ratio is 10%. Theoretically, the total amount of money in the entire social circulation system reaches 10 trillion. In this case, the reserve should be around 1 trillion, but hedge funds borrow 1 trillion in currency and sell it in the market, and the bank that lends the currency needs to replenish the reserve position. This replenishment can only be done through the interbank lending market borrow. As for borrowing Hong Kong dollars at rediscount from the HKMA, only the three note-issuing banks can do so.

   As a result, the more violent the attack on the Hong Kong dollar, the greater the position of the reserve that needs to be replenished, and even the lending rate will soar to an incredible height. In this case, it will be a heavy blow to the stock market.

  The relationship between the interbank offered rate and the stock market can be said to be a competitive relationship. If the inter-bank lending rate rises, it means that there is a shortage of inter-bank positions and liquidity is tight, the cost and profit of listed companies will decrease accordingly, and the intrinsic value of stocks will shrink, triggering a sell-off. At the same time, due to the rise in interest rates, the yield of bonds has risen, and investors are naturally more willing to buy bonds with falling prices.

   Moreover, the rise in interbank lending rates will trigger the banking system to lend cautiously or even repay loans in advance, which will reduce the investment of the entire society, thereby indirectly affecting the stock market.

  At this time, attacking the Hong Kong dollar may not necessarily be the first choice for speculation, nor is it the only choice. Because while attacking the Hong Kong dollar, the Hang Seng Index will definitely plummet. Not to mention the linkage between the interbank lending market and the stock market, judging from the current valuation of the Hong Kong market alone, there is a big bubble.

   Futures have become the first choice for shorting.

There is almost no hedging method for shorting currencies, because the cost is too low. Even if the Hong Kong dollar is successfully held in the end, the exchange rate is still 7.8 Hong Kong dollars to 1 U.S. dollar. In addition to paying the corresponding loan costs and exchange rate differences, hedge funds hardly use it. Then pay other things, so they dare to attack in the futures and spot foreign exchange markets unscrupulously.

   "What's the problem now?" It took Zhong Shi a full half an hour to analyze his research results in detail to all the researchers. When he finished speaking, he raised his water glass and took a big sip, then took another breath, before he had time to ask others for their reactions.

"What about interest rate futures?" Ren Ruowei said first, "If it follows what you said, then bond yields will definitely rise, and their prices will inevitably fall, and interest rate futures will have room for profit. Therefore, I think they Also be short on interest rate futures.”

"That's right!" Zhong Shi nodded approvingly, "According to my judgment, when hedge funds attack the Hong Kong dollar this time, they will attack from at least five aspects—Hong Kong stocks, interest rate futures, stock index futures, and HSI options. The last one is the Hong Kong dollar."

"As for how they will operate in the end, I can't say. But if it were me, I might start from the first few aspects, first short selling stocks, then short interest rate futures, Hang Seng Index futures, options, and then Hong Kong dollar futures , and finally sold a large number of Hong Kong stocks.”

"If a hedge fund wants to short sell Hong Kong dollars and buy U.S. dollars in the forward market, then its counterparty, assuming recovery, will buy Hong Kong dollars and sell U.S. dollars. In order to hedge the risk of Hong Kong dollar futures, HSBC will Selling Hong Kong dollars and buying U.S. dollars in the spot exchange market, everyone understands this swap transaction, right?"

  As soon as Zhong Shi finished speaking, all the traders smiled knowingly. Everyone naturally understood this most basic theory.

After a pause, Zhong Shi continued: "In the spot foreign exchange market, if HSBC wants to sell Hong Kong dollars and the counterparty is the Monetary Authority of Hong Kong, then the supply of Hong Kong dollars in the entire market will decrease, and the interbank lending rate will rise. And if it is For other commercial banks, the pressure on the depreciation of the Hong Kong dollar will increase. In order to alleviate the pressure on the depreciation of the Hong Kong dollar, the Monetary Authority can only raise the deposit rate of the Hong Kong dollar, and the lending rate will also rise.”

   "Then followed by Hang Seng Index futures, options, Hong Kong stocks, etc. This is a series of offensive means and plans, interlocking and designed to be airtight. It can be called a perfect offensive strategy."

"If the abnormality in the foreign exchange market these two days is their tentative behavior, then they have already started?" Ma Jiarui's face changed after hearing Zhong Shi's analysis. asked impatiently.

Zhong Shi looked at him, shook his head slowly, and said: "This time, the probing behavior is just to find out the flaws in Hong Kong's current market. I believe that after this time, they have already understood the relationship between Hong Kong stocks, exchange rates, and interest rates. I believe that when I come next time, I won't be dismissed so easily."

  "If they come prepared, I believe they have already made some moves in the Hong Kong stock market. Although we have a small share of investment in Hong Kong stocks, don't we need to prepare?" Liao Xiaohua asked.

   "Yes, we do need to do something, but not now." Zhong Shi nodded at Liao Xiaohua, "Also, this time we will not short Hong Kong dollars, everyone must be mentally prepared."

"what?"

"No way?"

  The meeting room suddenly exploded, and everyone except Ma Jiarui immediately became restless, expressing their shock in a hurry, with incredible expressions on their faces. If it wasn't for Zhong Shi's image of a **** in their hearts, someone would jump out and criticize his strategy immediately.

"Don't doubt my decision!" Faced with doubts, Zhong Shi's face immediately became extremely ugly, "Imagine, a region with nearly 100 billion US dollars is supported by a state with 150 billion US dollars behind it, Can an institution like ours offend such a large amount of foreign exchange reserves?"

   "If it is a political consideration, we can move the office to Singapore or Tokyo."

   "You're right, but you completely misunderstood what I meant. My opinion is that the Hong Kong dollar cannot be defeated!" Zhong Shi glanced coldly at the place where the voice came from, and said expressionlessly.

   "It is impossible for the Hong Kong dollar to be defeated?" The news immediately poured cold water on the hot-headed researchers. In the past few months, international speculative funds have been invincible and almost invincible, which makes them subconsciously believe that no matter which country or region's currency is targeted by them, it will eventually collapse. When Zhong Shi proposed that the Hong Kong dollar may not depreciate, they realized that this possibility does exist in theory.

   Of course, only in theory.

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  (end of this chapter)