Stock Infographics

Importance of HKD peg and the implications of unpeg

Publish date: Tue, 17 May 2022, 04:04 PM
Visual content on financial market and investment trends

Since the beginning of the year, Nasdaq has fallen by 30%. The market sentiment is so bad that the most common valuation method has changed. Earlier this year, the Price to Sales ratio (P/S) is the most commonly used multiple, then in April, the Price to Earnings (P/E) ratio starts to gain interest. Now, everyone is talking about the Price to Free Cash Flow Ratio (P/FCF) and starting to praise Warren Buffet's investment method.

Despite the worsening market sentiment, there are many "Gray Rhino" events that are being neglected. A stable coin has unpegged last week. Could another major asset class unpeg in the near future?

A few days back, HK Dollar Drops to the weak end of the band for the first time since 2019.

But why is the peg critical?

While Hong Kong does not produce as much as it did in the late 1990s, its importance to financial trade has risen significantly since then.

Hong Kong is the middle ground between the US and China, with investments pouring into China via the financial hub. 73% of the city's stock market value is of companies from China.

Hong Kong firms have special access in the US, such as HK firms receiving similar treatment to American peers by US derivatives regulators. That is far from the privileges Washington would ever grant to Beijing.

As a financial hub for foreign exchange, HK is overshadowed only by London and New York, serving as the third-largest place for trading USDs. Greenbacks changing hands in the city-state are fungible with those moving around in New York.

Impact of Unpeg

If HKD unpegs, capital flight will cause massive disruption to the stock, bond, and property markets. The cost of borrowing goes up, liquidity shrinks, and prices go into free fall because there are no buyers.

If the peg fails, it means the government has exhausted its reserve in defending it. Which may very well mean bankruptcy down the road.

Investors may think that Hong Kong still has big brother China to swoop down and save the day, but China itself is facing its own crisis and Hong Kong is no longer that important to China compared to 1997.

Worse still, Hong Kong is not an exporter like Japan and a fall in currency does not bring any advantages to the country's economy.

We shall watch this rate closely.

Source: iSquare

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