Former HKMA Chief Says Hong Kong Dollar to Decline in Importance

The importance of the Hong Kong dollar will gradually decline given China’s growing role in the global economy and financial system, said the city’s former central banker Joseph Yam.

For Hong Kong to remain as China’s financial center, the main currencies used for international trade and finance should be the Chinese yuan, the U.S. dollar and the euro, Yam wrote in a book published this week. The Hong Kong dollar is pegged to the U.S. currency.

“For a small economy that’s highly dependent on the mainland, it’s necessary to allow the Chinese currency to function conveniently in Hong Kong in the long term,” wrote Yam, who headed the Hong Kong Monetary Authority for 16 years before leaving in 2009.

Yam, who led a $15 billion defense of the Hong Kong dollar at the height of the Asian financial crisis, in 2012 called on the government to review its currency peg, questioning if it continues to serve the public interest. The city is facing “difficult questions” on how to upgrade its financial capability to serve China so that it won’t get marginalized from its role as a middleman, Yam wrote in the book.

Political developments in Hong Kong are probably eroding China’s confidence, “making them avoid relying too much on Hong Kong for international financing activities,” Yam wrote.

The city has been divided on electoral reforms needed to chose its chief executive through universal suffrage in 2017, with China insisting that all candidates must be vetted. More than 700,000 residents have voted in a 10-day referendum conducted by civic groups, where all the options include public nomination, drawing a rebuke from the Beijing government.

Dollar Peg

The Hong Kong dollar was pegged at HK$7.80 in 1983, when negotiations between China and the U.K. over returning the city to Chinese rule triggered 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 Hong Kong dollar will remain as the city’s fiat money at least until 2047 in accordance with the Basic Law, its de-facto constitution, Yam wrote.

For the Chinese currency, the nation’s record foreign-exchange reserve probably shows the authorities have intervened in the market, causing a drop in the yuan, Yam wrote. The government should pursue a yuan policy that makes it convertible but not freely exchangeable, which will help protect the nation from financial instability, he wrote.

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