Former HKMA Chief Calls for Review of Hong Kong Dollar Peg

Former Hong Kong Monetary Chief Joseph Yam
Former Hong Kong Monetary Chief Joseph Yam wrote, “There is a need to address the question as to whether the monetary system of Hong Kong, as currently structured, can continue to serve the public interest of Hong Kong.” Photographer: Ian Waldie/Bloomberg

Joseph Yam, the former Hong Kong monetary chief who helped introduce a dollar peg in 1983 and defended it against speculators during the Asian financial crisis, said the city should review its currency policy.

“There is a need to address the question as to whether the monetary system of Hong Kong, as currently structured, can continue to serve the public interest of Hong Kong,” Yam wrote in an academic paper titled ‘The Future of the Monetary System of Hong Kong.’ He outlined alternatives including a link to the yuan and said his decision to address the topic at this time “should not necessarily imply the need for change.”

Yam is the most senior serving or former Hong Kong official to speculate on changes to the 29-year-old currency link and Financial Secretary John Tsang told a press briefing he was “surprised” by the comments, adding that there are no plans to adjust the exchange rate. “Given Yam is the former chief, these remarks have significant implications and deserve serious attention,” said Raymond Yeung, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd.

The Hong Kong dollar rose as much as 0.09 percent versus the greenback before trading little changed at HK$7.7586 as of 6:05 p.m. local time, the biggest intraday move this month. It touched HK$7.7535, the strongest level since Feb. 22. Twelve-month forwards gained 0.06 percent to HK$7.7457, 0.17 percent stronger than the spot rate.

‘Fully Committed’

Hong Kong Monetary Authority Chief Executive Norman Chan, who succeeded Yam in October 2009, said today in a joint statement with Financial Secretary Tsang that the government is “fully committed” to the dollar peg and has no intention to change it. The paper published by Yam, who is an honorary professor of The Chinese University of Hong Kong’s business school, “contains nothing particularly new,” Tsang said at today’s press briefing.

The city’s Chief Executive-elect Leung Chun-ying, who begins a five-year term on July 1, said today there are no plans to adjust the link. Yam supported Leung’s rival, Henry Tang, in the city’s leadership contest in March. The current leader, Donald Tsang, said in November the existing exchange-rate system would stay at least until the yuan becomes fully convertible.

The International Monetary Fund said it had looked “very carefully” at the exchange-rate system when conducting its most recent annual assessment of Hong Kong’s economy in December.

The system is “simple, credible, transparent, is widely understood, and merits continued support,” according to an emailed statement.

Capital Outflows

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. The city’s currency has been kept at about HK$7.8 per dollar since 1983. In 2005, policy makers committed to limiting the currency’s decline to HK$7.85 per dollar and capping gains at HK$7.75.

Yam’s paper said the trading band could be widened or turned into “a corridor” whose width, slope and center could be periodically reviewed. The latter option could be managed against the dollar, yuan or a basket of currencies, he wrote.

China ended its own peg to the dollar in July 2005, saying it would manage the exchange rate against a basket of currencies, and the yuan has strengthened 30 percent versus the greenback in that time. 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.

Home Prices

There has been talk about whether Hong Kong should scrap the peg or re-peg to the Chinese yuan, as the current fixed exchange rate means the city’s monetary policy is largely dictated by the U.S., where a jobless rate of 8.2 percent has led the Federal Reserve to pledge near-zero interest rates through 2014. Hong Kong’s home prices have gained more than 80 percent since early 2009, supported by record-low mortgage rates.

“With the yuan increasingly becoming an international reserve currency, this debate will be getting more serious,” ANZ’s Yeung said. “I think the Hong Kong dollar will be more volatile.”

In January 2011, Hong Kong lawmakers Chim Pui Chung and Lam Tai Fai urged a review of the peg. Anita Fung, chairman of the Hong Kong Association of Banks and chief executive officer for Hong Kong at HSBC Holdings Plc, said today there is no “urgent need” to revise the current system.

More Volatility

With the dollar peg, Hong Kong has “inherently a higher degree of volatility in economic activities and in domestic prices,” Yam wrote in his paper. The city’s inflation has been “widely recognized” as uncomfortably high and asset bubbles have been a feature, he noted.

HSBC Chief Executive Officer Stuart Gulliver and his counterpart at the Bank of East Asia Ltd., David Li, said in August 2011 that any shift could be to a link with a basket of currencies.

William Ackman, founder of hedge fund Pershing Square Capital Management LP, said in September he’d placed a wager that would profit if Hong Kong allows its currency to appreciate against the dollar to curb inflation. The easiest way for the authorities to allow the currency to appreciate would be to change the peg to HK$6 per U.S. dollar, a 30 percent gain, and then link to the yuan over three to six years, he said.

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