- Former HKMA chief Joseph Yam offered some suggestions in 2012
- Change is unlikely to come anytime soon, analysts say
Speculation is mounting that the Hong Kong dollar’s 32-year-old peg to the greenback will end as tightening U.S. monetary policy and an economic slump in China put the link under pressure.
The city’s currency on Friday fell to a four-year low as concern about China’s economy fueled a selloff in the nation’s stock market. The Hong Kong Monetary Authority a day earlier reaffirmed its commitment to the existing exchange-rate mechanism, while Chief Executive Norman Chan said last month the local dollar’s peg is the cornerstone of financial and monetary stability in the city and there are no plans to amend it.
Here’s a reminder of the alternatives that were proposed by former HKMA chief Joseph Yam in 2012, when he called for a review:
1. A shift to a peg against China’s yuan
Such a link is premature and unlikely to happen in the next five to 10 years because the yuan, which won reserve status from the International Monetary Fund in November, needs time to establish itself as a stable currency, according to Raymond Yeung, a senior economist at Australia & New Zealand Banking Group Ltd. in Hong Kong,
“We don’t see any changes to the system for now despite the moves we’ve seen this week,” he said. “Hong Kong dollar volatility is a bellwether of the global market, not a reflection of speculation of a de-pegging.”
Options traders are betting the Hong Kong dollar’s peg is the most vulnerable it’s been in a decade, with prices late Friday in Asia indicating a 38 percent chance the currency would weaken beyond its current trading range this year, up from 9.5 percent on Dec. 31, Bloomberg data show.
“Those traders will be disappointed,” said Mole Hau, a Hong Kong-based economist at BNP Paribas SA. “Changing the framework anytime soon will be destabilizing and won’t be in the best interests of Hong Kong as a financial center. The HKMA has a track record of absorbing short-term pain to support the currency in either direction.”
2. A widening of the trading range
Hong Kong’s dollar was pegged to the greenback at a rate of about HK$7.80 in October 1983 and policy makers in 2005 committed to limiting declines to HK$7.85 and capping gains at HK$7.75. It sank as low as HK$7.799 versus the greenback on Friday, the weakest it’s been since September 2011, and touched the strong end of its trading range as recently as Jan. 4. The weakest it’s been in the past decade was HK$7.83 in 2007.
3. A managed rate within a corridor
This could be done versus the dollar, yuan or a basket of currencies, Yam said. That would be akin to Singapore, which guides its currency against an undisclosed basket and adjusts the pace of appreciation or depreciation by changing the slope, width and center of a band. It doesn’t disclose details of those metrics.
HSBC Holdings Plc Chief Executive Officer Stuart Gulliver and his counterpart at the Bank of East Asia Ltd., David Li, said in August 2011 that any change to Hong Kong’s exchange-rate system could be to a link with a basket of currencies. Peter Wong, Asia-Pacific chief executive officer of HSBC, said in 2014 that Hong Kong should study options for its exchange rate, including a possible tie to the yuan.
In a Bloomberg survey of 13 analysts carried out on the 30th anniversary of the Hong Kong dollar’s peg in October 2013, most respondents said any change to the existing peg should involve a link to the yuan or a basket of currencies.