China is “still a long way off” from making its currency fully convertible and until that happens Hong Kong can’t shift its dollar peg to the yuan, said John Greenwood, architect of the city’s exchange-rate system.
The Hong Kong dollar’s value has been kept at about HK$7.80 to the greenback since 1983 Chief Executive-elect Leung Chun-ying, who begins a five-year term on July 1, said last month he has no plans to adjust the link. The city’s current leader, Donald Tsang, said in November the existing arrangement would stay at least until the yuan becomes fully convertible.
China ended its currency peg to the dollar in 2005 after keeping the exchange rate stable for a decade. Chinese officials told European Union business executives that the yuan will achieve “full convertibility” by 2015, EU Chamber of Commerce in China President Davide Cucino said on Sept. 7. The People’s Bank of China doubled the yuan’s trading band to 1 percent and allowed lenders to hold short positions on dollar last week, steps seen as paving the way for a convertible currency.
“What Hong Kong needs in order to think about re-pegging would be for the Chinese yuan to be fully and irreversibly convertible,” Greenwood said in an interview in Hong Kong today. “2015 is not possible in my view.”
The Hong Kong 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 currency. In 2005, policy makers committed to limiting the currency’s decline to HK$7.85 per dollar and capping gains at HK$7.75.
The existing fixed-exchange-rate system ties Hong Kong’s monetary policy to that of the U.S., where the jobless rate is 8.2 percent and the Federal Reserve has pledged to maintain a near-zero benchmark interest rate through 2014. Hong Kong’s jobless rate is 3.4 percent and the city’s inflation excluding one-off reliefs reached 6.7 percent in January, the fastest since at least February 2007.