Thread by @Jkylebass

When reassuring yourselves about various levels of FX reserves, it’s imperative that we all remember what happened to Korea during the last Asian Currency Crisis. Korea was showing the largest pile of USD fx reserves in Asia. When the Thai baht broke the peg in 97’, 1/9

Investors were sanguine about Korea due to the reserve balance they were reporting. The problem was that the Korean central bank had ‘lent’ those reserves to their banks who had spent them defending the peg. The finance minister of Korea called US Treasury Secretary in a 2/9

panic and told him Korea had a desperate need for a USD loan from the US Treasury/FED. When rigid structures go south, all of the math, all of the belief,and then all of the reserves vaporize at such breathtaking speed. Those unprepared at the outset couldn’t get positioned 3/9

fast enough. When central bankers, HKMA executives, and Wall Street analysts begin daily deliveries of the Apostle’s Creed of Currency, you better begin to wonder what they aren’t telling you. No Wall Street firm will call that they believe any rigid currency board or peg is 4/9

likely to break or be revalued. They all have too much incentive to tow the party line. No finance minister will ever tell you that the regime they oversee is at risk of failure. In fact, they will tell you the exact opposite the VERY DAY before it breaks. The Thai government 5/9

said it would never devalue THE DAY BEFORE the peg broke. Funny bit of history there as well. The IMF was in daily communication with the Thai govt during the dark days of June 1997. The IMF told Thailand’s leadership to abandon the peg and not to spend all of the reserves 6/9

fighting the devaluation. The Thai government told the IMF that senior military leaders in the Thai forces ‘Hadn’t gotten their money out yet’ and that’s why they waited until the very end to let it go. The financial sausage making is worse than most think. 7/9

Rigid currency boards must have synchronous economies between the pegged currency sovereign and the pegging country. Unfortunately, China’s economy has 40% of its GDP locked down and 33% of its GDP down 20%+. The divergent economies and central bank activities are about to 8/9

break one of the world’s last ‘perfect’ relationships. 9/9 #China #HongKong #HKExit #HK