Trouble in Hong Kong- Part Deux (May 20 2019)

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Bank Assets (HKD) % of Total LCR Requirement (HKD) LCR Assets (HKD) LCR Ratio LCR Req/Bank Assets HSBC 7,587B 32.2% 973B 1,567B 161% 12.8% Tai Yau Bank 2,922B 12.4% 158B 498B 79% 5.4% Bank of China (Hong Kong) 2,820B 12.0% 310B 496B 160% 11.0% Tai Sang Bank 1,720B 7.3% 101B 282B 70% 5.8% Hang Seng Bank 1,424B 6.0% 140B 293B 209% 9.8% Standard Chartered 1,167B 4.9% 137B 212B 155% 11.7% ICBC Asia 894B 3.8% 39B 72.8B 186% 4.4% Bank of East Asia 816B 3.5% 34B 60.4B 180% 4.1% CCB Asia 481B 2.0% 20B 56.1B 277% 4.2% DBS Hong Kong 408B 1.7% 23B 36.3B 155% 5.7% Citic International 363B 1.5% 18B 45.5B 259% 4.8% Others 2,991B 12.7% 150B 5.0% Total 23,593B 2,102B Estimated HKD Portion Minimum HKMA Currency Board Size 40% 841 Source: Various bank Pillar 3 regulatory disclosures, Hayman estimates. Note Category 2 banks like Tai Yau and Tai Sang do not satisfy the LCR, but a Hong Kong‐specific Liquidity Maintenance Ratio. We make the relevant adjustments in the above table. There are other HKMA liabilities of the currency board, such as Currency‐in‐Circulation and Placements by Central Banks, which also cannot be readily extinguished by the HKMA and thus render the corresponding 70 billion USD of FX Reserves unusable. The remaining large category of HKMA liabilities is Hong Kong Government Statutory Deposits and Fiscal Reserves – amounting to 1.5 trillion HKD in total. These accounts are both the working capital of the Hong Kong government as well as the long‐term saving funds for government entities such as the Civil Service Pension Fund, the Housing Authority, the Employees Retraining Board, Hospital Authority and Elite Athletes Development Fund, amongst others 8 . Also, the Capital Works Reserve Fund and the Land Fund, other Hong Kong government entities which hold funds with the HKMA, are used to finance infrastructure projects such as the subway and railroad expansions and eventually the ambitious Lantau Reclamation project (which itself is projected to wipe out more than half of the city’s fiscal reserves) 9 . Once we adjust for the portion of the currency board that cannot be used (i.e., currency‐in‐circulation, a large portion of the EFB, etc.), we then deduct a portion of the Hong Kong Government’s Deposits and Fiscal Reserves 10 and some other smaller liabilities. The below table shows our calculations which both tie the HKMA/Exchange Fund reported Total Assets to the HKMA’s reported FX Reserve figure, as well as, our adjustments to arrive at usable FX Reserves. 8 See Notes 26 & 27 of the 2018 Exchange Fund Annual Report for a comprehensive list (https://www.hkma.gov.hk/media/eng/publication‐and‐research/annual‐report/2018/17_ExchangeFund.pdf) 9 https://www.scmp.com/news/hong‐kong/hong‐kong‐economy/article/3002340/massive‐hk624‐billionreclamation‐project‐will‐be 10 We estimate that only 80% of the 1.5 trillion HKD are held in foreign currency. 4 © Hayman Capital Management, L.P. 2019
Source: 2018 Exchange Fund Annual Report, HKMA, Hayman estimates These deductions lead us to our conclusion that the HKMA’s useable FX reserves are approximately $57 billion USD (or only 13% of reported reserves). To be clear, the HKMA will have to do some serious maneuvering to use anything substantially more than the Aggregate Balance 11 , which as of May 17, 2019 stands at 54 billion HKD or $7 billion USD. The greater question for investors is to what end? Why would the HKMA spend all of their remaining liquidity supporting a 36‐year relationship that has changed so dramatically over the last decade? Given China’s desire to increase the international use of the RMB and reduce the key role of the USD in global finance, why does a Chinese city still effectively use the USD as its currency? In conclusion, it is abundantly clear that Hong Kong fails the IMF’s definition of reserve adequacy. As if this fact were not worrisome enough, Hong Kong’s actual useable reserves, at a meager 13% of reported 11 The Aggregate Balance is the total size of the Hong Kong banks’ clearing accounts held at the HKMA. This is equivalent to the Reserve Balance that US banks hold with the Federal Reserve System. 5 © Hayman Capital Management, L.P. 2019
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Trouble in Hong Kong- Part Deux (May 20 2019)

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