The Hong Kong government is out of options, according to Deutsche Bank's chief economist in Asia. Speaking at Deutsche's annual Economic Outlook lunch - given to investors - Michael Spencer predicts that the Hong Kong dollar peg will be revalued by the end of 2003.
In his presentation he pointed out that the peg has led to chronic asset deflation in the property sector and a loss of household confidence. Unlike in Singapore, he pointed out, the pain of adjusting down the US dollar value of property prices has been taken in the asset itself - while in Singapore it has been in the value of the currency.
When combined with the government's now large structural defecit, that gives the authorities little room to manoeuvre now on the fiscal or the monetary front.
He therefore believes that the government will be forced to let the peg float by year end. He doesn't anticipate that this will lead to a drastic devaluation, however, since he believes this would create a loss of confidence.
He believes the government will manage the float very carefully, but that over the ensuing year it will lose around 10% of its current value versus the US dollar. This, he says, will be a cushion to the pain being felt in the property market, and spur a return of confidence.
Spencer admits his view, when contrasted with his peers, is "non-consensus".
Then again, with the exception of the Hong Kong dollar, Deutsche recommends a strategy of going long Asian currencies versus the US dollar in 2003. It calculates that non-Japan Asia now has $927 billion of foreign exchange reserves in its central banks - an increase of $153 billion from 2001. Deutsche believes that this number cannot be allowed to grow by much more as populations realize the opportunity costs involved in terms of sacrificing new investment at home to buy lower yielding US dollar assets abroad.
It calculates that Asian central banks make $19 billion in returns from such investments, but that the opportunity cost of not investing surplus reserves at home is around $20 billion for the region.
Its other big predictions of the day were that the Chinese yuan would appreciate in value (against the dollar) by 30% over the next decade; and that Vietnam would be the next Asian country to break into investment grade territory.