Foreign Exchange Market

Time for informed debate on the peg

PUBLISHED : Thursday, 14 June, 2012, 12:00am
UPDATED : Thursday, 14 June, 2012, 12:00am


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As chief of the Hong Kong Monetary Authority, Joseph Yam Chi-kwong was foremost among the defenders of the city's currency peg. He was one of its architects and his commitment to it was his chief legacy. Convention forbade him to think aloud about its future while he remained in office. Three years after his retirement he has done so from the groves of academia, and sent shock waves through the real world by saying we could do without it to curb inflation and asset bubbles. With hindsight, his remarks are not a total surprise. He was senior adviser to defeated chief executive candidate Henry Tang Ying-yen, who did not rule out an adjustment to the dollar's trading band against the US currency.

There is nothing new in doubts being raised about the peg's future. It has happened time and again over the years. But Yam is the most significant person ever to do so. Recently, many public figures have criticised the peg for contributing to inflation. In a research paper published by Chinese University, Yam seeks to lay out the issue in the context of the public interest in rapidly changing global and regional economies.

While at pains to emphasise he is not calling for de-pegging now, he clearly intended to kick off what hopefully will be an informed, calm debate - one that Hong Kong has to have - on the linked exchange rate system. It remains unclear why he chose to do it now, as a new administration prepares to take over on July 1 amid a financial crisis in Europe and doubts over the pace of growth in China. His timing has not made him popular. Officials were quick to reaffirm commitment to the currency peg, as Yam always did in his previous life.

Nonetheless, discussion of the future of the dollar peg cannot remain taboo forever, given China's moves to increase the yuan's role as an international currency, Hong Kong's growing role as an offshore yuan centre and the city's deepening integration with the mainland.

Internationalisation of the yuan, meaning the removal of state currency controls, remains years away, although events will move quickly once it is freed up. That leaves plenty of time to debate the alternatives suggested by Yam - managing it in a more flexible corridor against either the US dollar, the yuan or an undisclosed basket of currencies - and to weigh them against the current system.

The dollar peg has served Hong Kong well for three decades, but at the cost of harsh economic discipline, because it cedes control over interest rates and inflation. This freedom from political interference, however, is fundamental to international confidence in Hong Kong as a financial centre. The peg is, therefore, not to be abandoned lightly. Discussion of it may cause short-term anxieties but will be in Hong Kong's best interests in the long run.