I wrote in my last column about how China has devised a new way of putting pressure on the Hong Kong democracy protests: by getting business to do its bidding. It seems two can play at that game, and now the protestors are trying to do the same. They're trying to start a run on the banks, and break the Hong Kong dollar's currency peg to the U.S. dollar.
Beijing kicked this off by getting its airline regulator to put pressure on Hong Kong's leading airline, Cathay Pacific (CPCAY) . I anticipated that Beijing would next get the People's Bank of China and its banking and securities regulators to start squeezing Hong Kong banks and brokerages. The pro-democracy protesters beat me, and Beijing, to it.
Protesters have on Friday been taking as much money out of ATMs and banks as they can. There's a limit of HK$20,000 (US$2,550) that you can withdraw per day at the ATM in Hong Kong, though I imagine the bank has to give you what you've got there if you go in and demand it. Some protesters have also been converting Hong Kong dollars to U.S. dollars, which pressures the link between the two currencies, U.S.$1 being worth always around HK$7.78, thanks to the central bank's maneuvering.
Will they succeed? It's very unlikely. George Soros tried and failed to break the Hong Kong dollar peg in 1997 during the Asian financial crisis, but the city's central bank charged into the market and bought most of it to protect the currency. So Soros's bet that the Hong Kong dollar peg would fail like that of the Thai baht proved wrong, and costly (he made up for that with billions gained in Thailand and Malaysia). Hong Kong retains a massive cash war chest, backed of course by Beijing's US$3.1 trillion in foreign reserves.
But Friday's bank run certainly aims to hit the administration of city leader Chief Executive Carrie Lam, as well as the central government, where it hurts. In the wallet. Lam is far more concerned about keeping the economy in Hong Kong ticking along than meeting with protesters, let alone granting any of their five demands, chief among them being that she step down.
Now would clearly not be the time to buy Hong Kong or Chinese banking stocks. In fact, shorting them might be a good idea - and I'm not just saying that because the protesters would love that to happen!
There are three banks that issue currency in Hong Kong, where the government is unusual in getting companies to do that job. The Hong Kong Monetary Authority, the equivalent of a central bank, issues only the HK$10 (US$1.27) note itself. It farms out the printing of anything larger, with notes running up to HK$1,000 (US$127), to HSBC (HSBC) , the Bank of China (BACHY) and Standard Chartered (SCBFF) .
Hong Kong's banks, and the Hong Kong Financial Secretary, have stepped forward to present a stable front on Friday. But you'd expect banks to do that, wouldn't you?
In fact, many ATMs have run out of cash. Media reports suggest around half are not now in service, while some bank branches ran out of U.S. dollars to issue. Any chance of a sustained run on the banks looks very limited, for now, since this was a relatively small group of netizens who organized the effort.
HSBC, which has the most currency in circulation, says it has "a sufficient supply of banknotes, and is committed to supporting its customers and the smooth operation of the financial system in Hong Kong," a bank spokeswoman told the South China Morning Post. HSBC shares dropped 0.5% on Friday, bucking the 0.9% rise in the benchmark Hang Seng Index.
Smaller banks with ATMs in the city said they are monitoring the situation and putting contingency plans in place. They include HSBC's separately listed subsidiary Hang Seng (HSNGY) , which dipped 0.4% on Friday, as well as the Bank of East Asia (BKEAY) , up 1.0% on Friday in line with Hong Kong stocks in general, and the Singapore-owned banks (DBS) (DBSDY) and OCBC Wing Hang Bank, a subsidiary of Overseas-Chinese Banking Corp. (OVCHY) .
Should the go-for-the-cash strategy catch on, however, it could morph into something more significant. That's what happened with the planned three days of sit-ins at Hong Kong International Airport that started a week ago. Peaceful protests graduated into a mass movement that shut down the airport on Monday and Tuesday afternoons because there were too many protesters for people to check in.
It's the Chinese authorities that have kick started the corporate tactics.
China's airlines regulator has demanded that the city's leading airline, Cathay Pacific, provide staff details of all crew flying into or out of Chinese airspace. The authorities have also insisted that Cathay must not employ in China any crew who have been involved in the pro-democracy demonstrations that have roiled Hong Kong this summer.
That has led to the surprise resignation on Friday of Cathay Pacific's CEO, Rupert Hogg, as well as his chief deputy, Paul Loo, the airline's chief customer and commercial officer. The airline has fired four staff members over protest-related issues. Now the airline's leadership has fallen on its sword.
Hogg said in a company statement that "these have been challenging weeks for the airline and it is right that Paul and I take responsibility as leaders of the company."
The departures see the airline, part of the Swire Group, appoint all-Hong Kong Chinese leadership. Augustus Tang Kin-wing, the CEO of the group's airline-maintenance company Haeco HK:0044, becomes Cathay Pacific CEO. Ronald Lam Siu-por, who was only recently named CEO of the budget airline Hong Kong Express, which Cathay acquired in July, replaces Loo as chief customer and commercial officer.
The read I get on it is that Swire wants to appease China further, while also showing Hong Kongers that it's not afraid to fire at the top as much as the bottom. Hong Kong Chinese leaders tick both boxes, too.
Cathay Pacific Chairman John Slosar said that "recent events have called into question Cathay Pacific's commitment to flight safety and security and put our reputation and brand under pressure," which sounds a lot like a nod to China's prodding over letting agitators pilot planes over its airspace.
Cathay shares rose 2.1% on Friday, investors clearly betting that the chief executive's departure will clear the air a little. Hong Kong Chief Executive Lam insists on continuing in her post, with no senior departures at all from her administration since this entire mess began.
Besides Hong Kong bank shares, I'd suggest shorting the Hong Kong government, too.