Is it time for Hong Kong to tweak the historic US dollar peg?
Did you know the contract that pegs the Hong Kong dollar to the US dollar expires at the end of 2011? Odd as it may seem, not a lot of people do, what with the constant $7 and change being second nature to most Hongkongers now. But with the greenback diving to new lows recently and the United States losing its top credit rating, all eyes are on the future of the peg, a concept that has actually been on bankers and economists minds since as early as 2006 if WikiLeaks is to be believed.
Though it’s a done deal by press time, there was moderate debate about whether or not it was time for the Hong Kong dollar to float as an independent currency. The debate was short-lived, as the government firmly stated “no,” with a fairly simple rationale. “The peg is the foundation for Hong Kong’s financial and monetary stability,” is the official line as delivered by Norman Chan, chief executive of Hong Kong Monetary Authority (HKMA), the city’s de facto central bank.
The peg — maintained at approximately HK$7.8 against the US dollar — was established during Sino-British negotiations in 1983 to have a political function, which was mainly to alleviate market worries over the city’s handover in 1997. The HKMA intervenes if the exchange rate floats beyond the boundaries set at HK$7.75 to HK$7.85.
And few would forget lessons learnt: the city retained its peg when predatory speculator George Soros laid siege to the Hong Kong dollar in the currency crisis of 1997. While other Asian currencies devalued by 50 percent or more, the HKD held steady. “We want a stable currency,” said Chief Executive Donald Tsang in New York in November. “I am sure the market speculators want us to remove the peg. I’m sorry we are going to disappoint you. [The peg] will stay.”
Nonetheless, despite its theoretical stability, Hong Kong’s currency link to the declining US dollar has been blamed for fuelling high-flying inflation and, inevitably, pushing up property prices. Home prices have risen a whopping 80.5 percent since 2005 according to Centaline Property’s Centra-City Leading Index, which keeps track of local property prices.
The US dollar’s 6.8 percent plunge against the yuan two years ago has been drawing property buyers from the Mainland. “Mainlanders enjoy a 15 to 20 percent shopping discount, thanks to the undervalued Hong Kong dollar,” claims Thomas Lam Ho-man, Knight Frank’s head of research for Greater China. Yet speculators from the Mainland are not the only ones to blame, Lam added. “For luxury housing with a price tag of over $12 million, Mainland buyers account for only 20 to 30 percent of all transactions.”
Is there in fact someone to blame? Maintaining the currency peg means Hong Kong has to “import” US interest rates — a trade-off of currency stability. In other words, the now somewhat moribund US economy and its near-zero interest rates through mid-2013 means Hong Kong can do little to curb the inflow of hot money and rein in property prices and asset bubbles.
In the face of such a deadlock, there have been bold suggestions from some quarters to consider the yuan or other currencies for a peg. “The greenback is doing more harm than good, just like the case of late-’70s,” theorises Wu Zhipan, executive vice-president of Peking University. That was a time when the local currency was hooked to the pound sterling, which went on to depreciate almost 50 percent amid the socalled sterling crisis and prompted the city to peg with the dollar after floating for some time. “With respect to the Americans, the Chinese are very honest,” Wu added, despite Washington, the IMF and the World Bank’s regular criticisms of Beijing’s non-transparent currency policy. “[We] don’t want to leave our children waste paper.”
Yet authorities and economists are less optimistic, which Financial Secretary John Tsang made clear. “Linking the Hong Kong dollar to the yuan won’t work until the Mainland’s currency is fully convertible.” And that’s not going to happen any time soon. Chinese officials confirmed this by telling European Union business executives the yuan will only achieve full convertibility — or be traded freely — by 2015. To make matters worse, a currency that can’t be exchanged freely prevents it from being used in reserves under a linked exchange rate.
Others, including HSBC chief executive Stuart Gulliver, said in August any shift could be a re-peg with a basket of currencies. Yet a basket link could be hard to implement. “The very first [task] is we need to find a currency better than the US dollar. The yuan or euro? There seems to be no better alternative,” Lam said, particularly in light of the current Eurozone debacle. Furthermore, the US dollar is still the foremost international currency. Experts rule out the possibility of a free interest rate policy for economic adjustment too. “Even if Hong Kong links with a basket of other currencies, we will still need to follow their interest rate movements,” Chan points out.
Nevertheless, what might seem a seductive solution — a one-off currency reform, be it a revaluation or re-peg — could be a shock to homebuyers, inevitably destroying market confidence. As John Greenwood, architect of the dollar peg put it: “Although inflation is unpleasant, undesirable, it is a less cost than having a fluctuating currency.”
Most are opting for a more cautious approach. “More research and public consultation is needed before we can come up with the best arrangement for Hong Kong,” Lam finishes. “Plus, our chief executive is going soon. Continuity [of policies] is a bigger issue.”