Hong Kong must bear the pain of inflation to maintain the dollar peg because the Chinese city may be worse off with the alternatives, according to John Greenwood, architect of the city’s fixed-exchange-rate system.
Hong Kong’s consumer prices excluding distortions from government subsidies rose 6.3 percent in August from a year earlier, the highest rate since the global financial crisis in 2008. Accelerating inflation has highlighted limits on monetary policy in the city, where official interest rates move in sync with those of the U.S. Federal Reserve.
“Although inflation is unpleasant, undesirable, it is a lesser cost than having a fluctuating currency such as we had in 1983,” Greenwood, chief economist at Invesco Asset Management, said in an interview in Hong Kong yesterday. “We would be jeopardizing, potentially, a lot of the capital market activities if we have to move to a more volatile currency system.”
William Ackman, founder of hedge fund Pershing Square Capital Management LP, said last month he’s placed a wager that would profit if Hong Kong changes its 28-year-old currency peg, which holds at about HK$7.80 versus the U.S. dollar. Norman Chan, head of the Hong Kong Monetary Authority, the city’s de facto central bank, in August rejected proposals for a peg to a basket of currencies or the yuan instead of the greenback.
It’s not possible to peg the Hong Kong dollar to the yuan because the Chinese currency is not yet convertible, Greenwood said. There’s “no chance” the city will revalue to peg as that would “set up expectations that can be moved again,” he said.
Global Recession ‘Likely’
Inflation in the city “seems to have peaked” and there are risks of recession, Hong Kong Chief Executive Donald Tsang said today. Tsang announced yesterday one-off relief subsidies of HK$3.8 billion ($488 million) to help the poor cope with rising living costs in his final policy address.
Greenwood said a global recession is “quite likely” if the euro region “mishandles” Greece’s debt crisis. The prospect of Greece defaulting offers “the quickest and less costly solution” to the European sovereign debt crisis, even as this option may not be welcome by some policy makers because of the effect on banks and insurance companies, he said.
Financial markets will continue to have a “high degree of volatility” as investors bid up stocks whenever European leaders pledge help, only to sell when they are disappointed later by details of the proposed solutions, Greenwood said.
“If we have a major European crisis, I expect the Chinese to stop their appreciation” of the yuan, Greenwood said.