Hong Kong Peg to Yuan Is Still ‘Many Years’ Off, Greenwood Says

Hong Kong’s dollar peg shields the local economy from external shocks and it will be “many years” before a switch to a yuan link can be considered, according to John Greenwood, architect of the city’s exchange-rate system.

“At the time being, the renminbi is not fully convertible and therefore it’s not suitable for the Hong Kong dollar to peg to,” Greenwood, chief economist of Invesco Asset Management, said in a speech in Hong Kong today. “The Hong Kong dollar linked exchange-rate mechanism requires a fully convertible currency as anchor currency.”

The city’s dollar peg was adopted in 1983 when negotiations between China and the U.K. over returning the city to Chinese control triggered capital outflows and Greenwood suggested a currency board system to stabilize the exchange rate. He has been a member of the currency board operations committee of the Hong Kong Monetary Authority since 1998.

The Hong Kong dollar’s value is kept at around HK$7.8 versus the greenback. In 2005, policy makers committed to limiting the currency’s decline to HK$7.85 and capping gains at HK$7.75. It would be unwise to switch to a peg versus a basket of currencies or to allow to the Hong Kong dollar to float, Greenwood said, adding that the existing system works well.

The Hong Kong Monetary Authority injected almost $14 billion between October and December as the local currency’s move to HK$7.75 obliged it to buy U.S. dollars in the foreign- exchange market. Signs of a pickup in China’s economy and monetary easing in the U.S., Europe and Japan had spurred capital inflows into the city.

Ackman’s Bet

The Hong Kong dollar traded at HK$7.7640 versus its U.S. counterpart as of 2:23 p.m. in the city. It has weakened 0.16 percent this year. Twelve-month non-deliverable forwards traded at HK$7.7533.

All but one of the 20 analysts polled by Bloomberg News in November, including Citigroup Inc. and JPMorgan Chase & Co., said they expected the city’s fixed exchange-rate system to last for at least five more years.

William Ackman, founder of Pershing Square Capital Management LP, told a conference in September 2011 that the easiest way for Hong Kong to allow an appreciation would be a reset of the peg at HK$6 versus the U.S. currency followed by a switch to a yuan link over three to six years. The hedge-fund manager said in October 2012 that he was keeping the wager.

Such a bet has so far been a losing trade as Hong Kong officials repeatedly pledged to keep an exchange-rate system that survived the Asian financial crisis in the late 1990s and the global recession in 2009. K.C. Chan, the city’s secretary for financial services and the treasury, said in January Ackman won’t realize his bet.

Yuan Controls

China ended its currency peg to the dollar in July 2005 after keeping the exchange rate stable for a decade. HSBC Holdings Plc forecast in March the yuan will become fully convertible within five years. Interest-rate liberalization is necessary before capital controls can end and policy makers are making “slow” progress on this front, Greenwood said.

The yuan strengthened to a 19-year high at 6.1616 per dollar on April 26 after the People’s Bank of China set a record reference rate for the currency amid signs capital inflows are gathering pace. The spot rate in Shanghai is allowed to diverge a maximum 1 percent on either side of the daily fixing.

PBOC Deputy Governor Yi Gang said April 18 that the yuan’s trading band would be widened “in the near future.” The last revision, which doubled the maximum permitted divergence from the reference rate, was announced on April 14, 2012. The yuan ended last week at 6.1650 per dollar, 0.9 percent stronger than the PBOC’s fixing on April 26. China’s financial markets are closed April 29 to May 1 for a holiday.

In Hong Kong’s offshore market, the yuan was 0.05 percent stronger today at 6.1635 per dollar, according to data compiled by Bloomberg. It touched 6.1617 on April 26, the strongest level since trading began in 2010.

To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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