Why Investors Keep Losing Money Betting Against The Hong Kong Dollar Peg

Joe Weisenthal (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

So Tracy, you're in Hong Kong. Obviously, we've been talking about some recent episodes about some of the re-emergence of the virus there.

But also, virus aside, this is just a big moment in time for Hong Kong, for obvious reasons.

Tracy Alloway (0:36)

Yeah, there's no shortage of news flow here in Hong Kong, aside from the virus, we've had a year of unrest in the form of the big protests against extradition law. And now, most recently, in the past month, we've had the imposition of a new national security law, which gives China sweeping powers, I guess you'd say, over Hong Kong.

Joe Weisenthal (1:02)

Right, so I remember thinking a year ago, it was pretty like a, because a year ago by now, the protests had really gathered steam. It was like last summer, when we really saw the re-acceleration of the protests, and you and I would be on meetings pretty regularly, and you'd have to talk to us about how you were getting into work and so forth, and things like that.

Tracy Alloway (1:25)

Yep, that's right.

Joe Weisenthal (1:26)

So you must be pretty exhausted.

Tracy Alloway (1:31)

I mean, look, there's a lot going on in the world.

But yeah, definitely a lot going on in Hong Kong. And the mood is pretty morose at the moment, I gotta say. And then beyond that, of course, we have the economic situation, which is that Hong Kong just can't catch a break. So we already saw the Hong Kong economy affected by the protests. Lots of mainland tourists and shoppers stopped coming into the city. And then of course, we had the virus cases beginning to really build up earlier in the year. Now we have the third wave, so that continues to hit the economy. And now we also have the national security law. And again, the question there is slightly different to viruses and protests, which sort of hit the retail sector the hardest.

Question about the national security law is whether or not it's going to impact the international character of Hong Kong as a financial center, an international financial center.

Joe Weisenthal (2:29)

Right. So obviously, we've seen all this pressure build on Hong Kong, which reminds me or which calls to mind that essentially for the last decade, I feel like every year or every two years or something, there's some new hedge funder coming out that predicts the imminent severing of the link between the Hong Kong dollar and the US dollar.

And for those who don't know, for a long time, the Hong Kong dollar has been pegged to be stable with the US dollar. What's it pegged at again? Do you remember? You must know, you must have the...

Tracy Alloway (3:01)

Since 1983, and you know I remember that because it's my birthday. I am the same age as the Hong Kong dollar peg.

Joe Weisenthal (3:08)

So what's it pegged at?

Tracy Alloway (3:09)

Oh, what is it pegged at? Oh, sorry, I thought you said when was it pegged.

I think it was pegged between 7.75 to 7.85, something like that.

Joe Weisenthal (3:21)

Yeah, there it is.

So you have all these hedge funders and every year, they're like, oh, this is the year that the Hong Kong dollar peg is finally gonna break. But as you point out, since 1983, it's held quite firm.

Tracy Alloway (3:33)

Yeah, there've been a couple of voices who've been especially vocal recently. One of them is Kyle Bass, who I think has actually started a whole new fund dedicated to betting on a collapse in the peg.

And it's an interesting one. I feel like whenever you have a dollar peg, I feel like people are always talking about the potential for it to break for obvious reasons. When I was in Abu Dhabi and Dubai, you know, there was talk about the peg in the UAE that was always under pressure and on the verge of collapse, according to some people. But the Hong Kong peg, it's an interesting one.

Joe Weisenthal (4:09)

It is, and we're gonna be talking about it today. And you know, obviously it's, you know, even in the setup here, talking about all the pressure on Hong Kong from various angles, you know, there's all kinds of reasons to argue that the peg is going to break, but we almost never hear the other side, which is that the peg has been very durable and why the peg won't necessarily break.

So that's what we're going to discuss on the episode today. We are going to be talking with Chris Wiegand. He is the CIO and co-founder of Royal Bridge Capital, a hedge fund.