(Bloomberg) — Currency traders looking for their next big idea could do worse than talking to Wong, who runs a kiosk in Hong Kong’s Central District.
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Her business is one of many street stalls that line the city’s bustling financial district, selling newspapers, magazines and bottled water to everyone from wealthy executives to Chinese tourists on sightseeing trips.
This diverse clientele has turned Wong into an informal currency trader – and right now he’s betting that the Chinese yuan will weaken to parity against the Hong Kong dollar.
The yuan has lost more than 12% of its value against its neighboring currency in the past three years, putting it on track to reach parity for the first time since 2007. The decline has hurt spending by tourists from mainland China, prompting locals to cross borders for shopping trips and forced consumers and businesses across the city to adapt.
Wong posted a sign on the side of her kiosk, demanding that any customer who wanted to pay in yuan accept a one-for-one exchange rate for the Hong Kong dollar. Tourists previously refused this rate, but they are increasingly willing to accept it, she said. Some even ask her to provide them with an exchange office, without any goods passing through their hands.
The yuan has pulled lower as China’s fragile economy faces deflationary pressures, capital outflows and volatile bond yields. In contrast, the Hong Kong dollar — pegged to the greenback during the U.S. currency’s boom — is rising in value.
The currency shift exacerbated pressure on Hong Kong, which suffered a 7.3% year-on-year drop in retail sales in November, ending nine months of declines, according to the latest data.
The most bearish analysts think the Chinese currency could weaken to near 7.75 to the US dollar by the third quarter, a move that would put the yuan near the top of the Hong Kong dollar’s allowed trading range against the greenback.
There are some positives to the yuan’s decline, at least for those working in finance: Onshore investors chasing higher yields rushed to buy foreign bonds, pushing flows south through the China-Hong Kong bond trading nexus to a two-year high in December. Issuance of dim sum bonds, offshore notes denominated in the Chinese currency, has surged as borrowers seek cheaper financing options.
