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Conditions Not Right for Hong Kong Peg to Yuan, HKMA's Chan Says

Oct. 15 (Bloomberg) -- The conditions required to peg the Hong Kong dollar to the yuan don’t exist and there is no need or intention to change the current system, the city’s monetary authority chief said.

“One important pre-condition is that the ‘anchor’ currency must be totally and freely convertible so that we could hold the currency assets as backing for the Hong Kong dollar,” Chief Executive Norman Chan wrote in a column published on the Hong Kong Monetary Authority’s website yesterday. “This is crucial in upholding confidence in the Hong Kong dollar and maintaining exchange-rate stability.”

He added that it is “too early to consider the use of renminbi as our anchor currency while it is not yet freely convertible and the capital account of the mainland is still not fully liberalized.”

Hong Kong linked its exchange rate to the U.S. dollar on Oct. 17, 1983, when negotiations between China and the U.K. over the city’s return to Chinese rule spurred capital outflows. The currency has been kept at around HK$7.8 per U.S. dollar since then. 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 Hong Kong dollar was little changed at HK$7.7544 yesterday. The city’s stock market was shut for a public holiday.

China’s Yuan

China ended its currency peg to the dollar in 2005 after keeping the exchange rate stable for a decade. The yuan now trades in a managed range against a basket of major currencies, with different rates inside and outside of China. Its daily moves in Shanghai are limited to 1 percent on either side of a reference rate set each day by the People’s Bank of China.

HSBC Holdings Plc forecast in a March report that the yuan will become freely convertible within five years and Premier Li Keqiang signaled in May that the government will propose plans this year to allow freer flows in and out of the nation as part of measures to loosen control over the yuan and on interest rates.

The HKMA holds more than $300 billion of foreign-exchange assets, mostly in the greenback, Chan said. If the peg’s anchor currency were changed to the yuan, the authority will need to hold almost 2 trillion yuan ($327 billion) in assets, which is more than the size of the entire offshore yuan market, he said.

The yuan has appreciated 35 percent against the greenback since the end of its peg in July 2005, according to data compiled by Bloomberg. The currency has advanced 2 percent this year, bucking declines in 10 other Asian currencies including India’s rupee and Indonesia’s rupiah. The Hong Kong dollar is little changed.

Turmoil, Resilience

“Whenever Hong Kong experienced turmoil, the linked exchange rate system demonstrated its resilience and served as the cornerstone for Hong Kong’s monetary and financial stability,” Chan said.

A strong Hong Kong dollar would be “quite a negative factor” for the city’s exporters as that would make their goods more expensive, Chan said. If the city’s currency were pegged to the yuan, exports and competitiveness would substantially weaken, he added.

“Let me affirm that, for the reasons set out above, there is neither the need or the intention to change the linked exchange rate system,” Chan said.

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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