Pegged out? - John Gong
To fix or not to fix, that is the question. Or maybe it's the monetary system itself that needs a fix.
These are the messages contained in a 34-page paper by Joseph Yam Chi-kwong, on the Hong Kong dollar's peg to the US dollar. (I have seen so many news reports mentioning a 27-page paper that I cannot help wondering how many of those reporters actually read Yam's paper).
Yam, of course, had stood by the peg from 1993, when he became the first chief executive of the Monetary Authority, until he retired in 2009. He is now an adjunct professor at the Chinese University.
The peg at 7.8 to the US dollar earned Yam the dubious title of Mr7.8 for the past 30 years or so. In 1998, he used massive amounts of government funds to buy up Hong Kong equities to protect the economy from currency speculators like George Soros, who of course is famous for 'breaking' the Bank of England.
So when Mr 7.8 says 7.8 is no good, we'd better listen. After all, he is the man with the credentials.
Yam even provided a legal analysis in the paper on how Hong Kong can abandon the fixed peg and still comply with articles 109 to 113 of the Basic Law that deal with the financial and monetary system.
But the heart of his paper points to just one important issue, concerning the HKMA's capacity to adopt a more proactive and more discretionary monetary policy that serves objectives well beyond just maintaining currency stability, such as stimulating economic growth and generating more jobs for Hong Kong.
Allowed only 1,000 pips of the exchange rate movement band to work with, between 7.75 and 7.85, the HKMA can do only so much. Independent monetary policy in Hong Kong is a joke, serving as nothing more than a faraway but certainly not tenuous extension of Washington's monetary policies.
Every Hong Kong dollar needs to be backed by US dollar assets. When Washington sets a low interest rate, Hong Kong has to follow, since it needs to take into account the returns on dollar holdings. After nearly 30 years of a fixed peg, which is longer than many marriages, I presume, Hong Kong has already slipped into the de facto status of 'dollarisation'.
With such a fixation on the dollar peg, other macroeconomic objectives are understandably compromised.
The special administrative region has sat tight, doing nothing in the face of the soaraway inflation over the last several years. We have seen wide swings in property values in Hong Kong, and we've seen massive amounts of capital outflows to the north as people dump Hong Kong dollars in droves in favour of renminbi assets. Yam rightfully points out this dilemma and suggests that the goal of growth and jobs should precede that of exchange rate stability, especially in hard times when we need to stimulate an economy under stress and help communities in pain. He even elevates this issue to one that touches on democracy.
Take a look at any graph that plots the Hong Kong dollar's movement against the renminbi for the past 10 years. It looks like a perfect slope for downhill skiing.
Talk to people on the street, and it is not difficult to feel Hong Kong people's disdain for the 7.8 fixed - or, more appropriately, fixated - peg.
'There was growing concern about 'the renminbi premium' getting bigger all the time,' Yam wrote, quoting friends, 'leading to mainland people psychologically 'belittling the value of Hong Kong people's money' and thus 'eroding the respect of the Hong Kong people when they are on the mainland'.' Yam even tantalisingly touched upon the possibility of phasing out the Hong Kong dollar altogether, a point with which I concur strongly.
The policy of 'one country, two currencies' has served Hong Kong well so far. But as Hong Kong's economy becomes more intertwined with the mainland's, as opposed to America's, the SAR inevitably has to contemplate the long-term usefulness of issuing its own little legal tender, especially when the renminbi becomes internationalised.
The 7.8 peg cannot be sustained for that long. With the renminbi forecast to get stronger over the long run, Hong Kong dollar's future is a one-way street and its function serves only one purpose - making people poorer every day compared to their northern neighbours. And what is the use of a currency like that?
The bureaucrats at the HKMA are slow movers. And they are bankers, who are additionally conservative.
An academic paper written by their former boss is not likely to change things, or minds; indeed, the HKMA has already issued a calm statement politely rejecting Yam's proposal.
Perhaps it is time for some legislators to propose a bill to put the issue to the ballot.
John Gong is associate professor at the Beijing-based University of International Business and Economics. johngong@ gmail.com