Making big bets on Hong Kong’s future (Edward Chin)
It is very likely that the national security law applied to Hong Kong will be enacted before July 1. The International Chamber of Commerce (ICC- HK Chapter) came out timely with a statement warning passing the national security law without any public consultation has already triggered fear and confidence issue in the city. Hong Kongers should be protected with a high degree of autonomy under the Basic Law at least until June 30, 2047. We are now short-changed of that promise by a whopping 27 years.
When July 1, 2020 arrives, Hong Kong people might for the first time since 1997 be banned from the annual democracy march moving forward. Indeed, a partying mood is grim, but some sort of a decent turnout this year is still expected. Millions of people took to the streets last year to fight against the Extradition Bill that finally got retracted. Just like the June 4 Tiananmen vigil three weeks ago, Hong Kongers will still come out to the streets, as people are frustrated and alarmed with the uncertainties under tyranny.
The waves of resistance to the upcoming evil law on Hong Kong is far from over. Professionals and people from all walks of life are having grave concern about Beijing’s selection of judges’ assignment in Hong Kong when it relates to national security, foreign interference, military defense and much more. The possible set up of an interrogation chamber with “suspected individuals” given indefinite period of detainment in Hong Kong creates a shock wave. It reminds us of the two Canadians, Michael Spavor and Michael Kovrig, who have been held hostage in China since December of 2018, and were alleged to be endangering China’s state security. The two Michaels were formally charged with espionage last week, and had their contact completely cut off. Their fate remains unclear.
The Trudeau government in Canada has been perceived as being weak when dealing with China, but some senators are fighting back against China’s bullying. In a June 23 letter written by two Conservative Party senators and consigned by 11 others, the Canadian parliamentarians urged the federal government to impose sanctions on Chinese officials for gross violations of human rights and fundamental freedoms. It is stated by the parliamentarians that China's detention of Uighur Muslims, its crackdown on democratic rights in Hong Kong, repression of Tibet over the last decades, and its imprisonment of Canadians Michael Spavor and Michael Kovrig are the biggest threat to mankind and a danger to international security. Let us see whether the Magnitsky Act can be used to penalize Beijing and Hong Kong officials who have violated these internationally recognized human rights. It could mean denial of entry, and freezing of assets in Canada owned by foreign nationals from China and Hong Kong that grossly infringes on human rights. At the time of writing, the U.S. Senate has also passed a bill that punishes China for enacting the national security law in Hong Kong, which is encouraging.
Some journalists have asked me whether I can locate businesses, and financial institutions in particular, the high echelon personnel of which are brave and vocal enough to speak up against the enactment of the national security law applied to Hong Kong. Businesses, be they big or small, always have their own agenda. Financial firms in certain size and with certain leverage mostly will have their own BCP (Business Continuity Plan). They will “pull the trigger” when situation in Hong Kong is no longer stable. Instead of blowing the trumpet out loud, exiting quietly is a more preferred strategy. Nobody wants to see Hong Kong “go under”, but the unthinkable might arrive without warning.
With that said, Kyle Bass, an influential hedge fund manager based in the U.S. is betting on the fall of the Hong Kong dollar in the next 18 months. Special situation hedge fund strategies rely on catalysts to make an investment call, which might involve options or over the counter (OTC) contracts drafted between the investment bank and the fund manager. Overall, the fund manager looks for windfall gains if his market call is right. The “market experiment” is somewhat like playing red or black on a roulette table, but at the expense of the investors who put up the money. All in all, Bass is expecting a devaluation of the HKD by at least 40% versus the US dollar in a year and a half, and an exodus of multinationals from Hong Kong when the city becomes unstable.
Kyle Bass is hinting using an investment leverage of 200 times would result in huge windfall gain or total loss of the risk capital. It is believed that Bass’ “pet project” will charge a 2% management fee and an incentivized performance fee of 15%, but to be moved up to 20% if return is above 100%. If the position is trade through options of sorts, the “time value” of these instruments could get depleted very quickly over time.
The Hong Kong currency, pegged with the U.S. dollar at a 7.75-7.85 narrow band trading range, could eventually collapse, from the perspective of the risk taking strategy of Bass’. Not sure how big of a fund size Bass could raise, but the “winners take all” approach using other peoples’ money is just downright risky. Let us not forget during the Asian Financial Crisis in 1998, the Hong Kong government spent HK$118 billion to buy stocks and futures to drive away currency speculators who wanted to break the HKD/ USD peg. George Soros, the legendary hedge fund manager and founder of Soros Fund Management, failed to make money in 1998 by betting against the HKD and the Hong Kong market. 22 years later, Kyle Bass is “going for the jugular” using other people’s funds. Let’s keep track and see whether this currency options play will be meaningful at all.
The whole world now lay eyes on Hong Kong, not because of the speculative bet of a hedge fund manager on the HKD currency, but on the shock of Beijing’s gobbling up of Hong Kong’s legacy and future. Beijing will interpret the national security law in whatever way they want until they are satisfied, and against the will of Hong Kong people and the free world. It is our obligation and privilege to resist. It is our Hong Kong and our freedoms. We shall not die or vanish under tyranny.
(Edward Chin runs a family office. Chin was formerly Country Head of a UK publicly listed hedge fund, the largest of its kind measured by asset under management. Outside the hedge funds space, Chin is Convenor of 2047 Hong Kong Monitor and a Senior Advisor of Reporters Without Borders (RSF, HK & Macau). Chin studied speech communication at the University of Minnesota, and received his MBA from the University of Toronto. Twitter: edwardckchin Youtube: Ed Chin Facebook.com/edckchin Email:
[email protected])
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