Hong Kong Pledges Currency Peg After Yam Urges Review

Hong Kong’s incoming leader, financial secretary and top central banker all pledged their commitment to the city’s currency peg after former monetary chief Joseph Yam called for a review of the link to the dollar.

Hong Kong Monetary Authority Chief Executive Norman Chan, who succeeded Yam in October 2009, said yesterday in a joint statement with Financial Secretary John Tsang that the government is “fully committed” to the peg and has no intention to change it. The city’s Chief Executive-elect Leung Chun-ying, who begins a five-year term on July 1, also said there are no plans to adjust the link.

Yam is the most senior serving or former Hong Kong official to speculate on changes to the 29-year-old currency link and Tsang told a press briefing he was “surprised” by the comments. The Hong Kong dollar rose as much as 0.06 percent to HK$7.7535 versus the greenback yesterday in the city after Yam’s call for a review of the system, before closing little changed at HK$7.7586. It was unchanged today as of 9:44 a.m. local time.

“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.

Yam returned to the public spotlight when he supported Leung’s rival, Henry Tang, in a March leadership contest. On June 7, he dismissed a Legislative Council subcommittee report that he held ultimate responsibility for the mis-selling of financial products linked to Lehman Brothers Holdings Inc., which led to losses for locals when the bank collapsed in 2008.

Yuan Peg?

Options put forward by Yam included a shift to a peg against the yuan, a widening of the trading band versus the dollar and a “corridor” whose width, slope and center could be periodically reviewed. The latter system could be managed against the dollar, yuan or a basket of currencies, he said.

Twelve-month forwards weakened 0.06 percent to HK$7.7503 versus the U.S. currency today in Hong Kong, after gaining a similar amount yesterday. The contracts, which are 0.11 percent stronger than the spot rate, reflect differences in interest rates for the two currencies as well as expectations for moves in the exchange rate.

“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” that was released yesterday. He said his decision to address the topic at this time “should not necessarily imply the need for change.”

Nothing New

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 a press briefing yesterday.

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.

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

Yuan Convertibility

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.

Hong Kong’s current leader, Donald Tsang, said in November the city’s existing exchange-rate system would stay at least until the yuan becomes fully convertible. 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.

There has been talk about whether Hong Kong should scrap the peg or re-peg to the 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.

Higher 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. Yam supported Leung’s rival, Henry Tang, in a March leadership contest.

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. Such a system is employed by Singapore, whose dollar has strengthened 1.1 percent versus the greenback this year.

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 29 percent gain, and then link to the yuan over three to six years, he said at a conference.