Bass Rebuts Critics of HKD Short

The letter explaining the short on the Hong Kong Dollar, viewable at ZH: Kyle Bass Hits Back At Critics Of His Latest 'Big Short'

One section isn't a direct argument, but I think it bears consideration for those who think Hong Kong, China or any other nation have enough reserves:

This issue is analogous to the current debate surrounding the size of the United States Federal Reserve’s balance sheet. The extraordinary measures taken since the financial crisis led to the Fed’s balance sheet expanding to a peak size of $4.7 trillion USD. Beginning in the fall of 2017, the Fed began to reduce the total size of the balance sheet which now stands at $3.9 trillion USD and is forecast to shrink to approximately $3.5 trillion USD. Since 2018, a debate has ensued as to how much the Fed’s balance sheet could actually be run off. Between the USD currency‐in‐circulation and the Basel 3 Liquidity Coverage Ratios (LCRs) that US banks are required to satisfy, the Fed cannot possibly reduce its balance sheet anywhere close to zero. Our own estimate is that the Fed couldn’t go much below $3.5 trillion USD without causing severe interest rate volatility as banks would start to bid for fed funds in ways the Fed would have trouble smoothing out with open market operations. The ensuing economic consequences would be disastrous to a highly levered economy.

Therefore, if you can’t reduce your liabilities, you can’t reduce your assets by definition. The Fed originally said their balance sheet was going to shrink to around $2.5 trillion but they are giving up at $3.5 trillion. It turns out that banks needed more reserves than they realized, and they only learned this through bank surveys. But they also have started to have issues with controlling short term rates (which is why they keep cutting interest on excess reserves (IOER) because the fed funds rate isn't acting as they thought it should).

Most of the world hasn't deleveraged, instead leveraged up with debt to forestall a denouement in the credit markets. Among those who have, many have substituted public debt for private debt. The U.S. is in a relatively strong position vis a vis the rest of the world. The Federal Reserve is among those who deny the decline in reserves impacted financial markets, yet it is still abandoning its balance sheet reduction in contradiction to Chair Yellen stating this would only occur in concert with rate cuts. (Or is the Fed exploiting everyone's bad memory and telegraphing a September rate cut?) For a nation such as China to refuse balance sheet reduction (refuse to exchange renminbi for foreign currency), it is effectively floating the currency. For nation with a hard peg such as Hong Kong, refusing to reduce the balance sheet breaks the peg.