Hong Kong Financial Secretary John Tsang rejected calls from lawmakers to review the city’s 29-year-old dollar peg amid rising concern asset prices are being driven to unsustainable levels by record-low borrowing costs.
The exchange-rate system ties the city’s monetary policy to that of the U.S., where the Federal Reserve is using near-zero interest rates to help the economy recover from a recession. Linking the Hong Kong dollar to a basket of currencies won’t have much effect on local rates, Tsang told the Legislative Council today.
“It is not transparent enough and is more complex and hard to understand,” he said. “A peg to a basket is still a fixed exchange-rate system and it also takes away an independent monetary policy. Interest rates wouldn’t be much different from the current levels.”
Hong Kong’s home prices more than doubled in the past three years and have surpassed their 1997 peak, fueled by low interest rates and purchases by mainland Chinese. The Hong Kong Monetary Authority bought a combined $4.2 billion of the U.S. currency this month, defending the upper limit of the peg for the first time in three years, as a third round of asset purchases by the Federal Reserve boosted the supply of the greenback.
The peg “isn’t the main reason” behind the pickup in capital inflows as other Asian countries are experiencing similar surges, Tsang said today. His comments echoed those of the city’s monetary chief Norman Chan, who said Nov. 9 that talk of so-called hot money flowing into Hong Kong to speculate on the yuan is “unfounded.”
Hong Kong linked its exchange rate to the U.S. dollar in 1983 when negotiations between China and the U.K. over the city’s return to Chinese rule spurred capital outflows. 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 Federal Reserve initiated a third phase of so-called quantitative easing on Sept. 13, purchasing $40 billion of mortgage-backed securities per month. The European Central Bank pledged in the same month to buy the bonds of governments that agree to austerity conditions.