Fixed Exchange Rate

HK's circumstances have not altered enough to invalidate peg to US dollar

PUBLISHED : Saturday, 16 June, 2012, 12:00am
UPDATED : Saturday, 16 June, 2012, 12:00am

Joseph Yam Chi-kwong's recent paper rehearses at length the arguments for and against the Hong Kong peg to the US dollar ('HK 'can ditch dollar peg' - Yam', June 13) and the technical and legal mechanisms surrounding it. None of these has changed since he stood down three years ago from the Monetary Authority, where he had been such a vigorous defender of the peg.

Now, although taking care to remain neutral, he raises doubts over its durability, which he would surely never have voiced so forthrightly while in office. He appears to justify his shift in stance by reference to changing circumstances. Thus he implies that the global financial crisis makes it desirable for the Monetary Authority to have more flexibility in the use of its assets than the peg arrangements allow.

However, it is perfectly possible for the government itself to intervene, for example in support of ailing financial institutions, funding itself by drawing on the fiscal reserve or by borrowing, without the HKMA having to compromise any of the peg's monetary discipline. He goes on to question whether an international financial centre of Hong Kong's scale can operate 'with a domestic currency system that is not the national currency system of a much bigger economy'.

The simple answer is that it can and it does, and there is no convincing reason why it should not continue to. I left the Monetary Authority in 2003. I was a staunch supporter of the peg then, and my present view, for what it's worth, is that relevant circumstances have not altered enough to invalidate that support.

In 2047, the Hong Kong dollar will inevitably be fused with the renminbi. Many expect it to happen sooner. Whether it does should depend on the timing of full renminbi convertibility, the People's Bank's record in conducting monetary policy, and the degree of structural convergence between the two economies.

One cannot entirely rule out some other sort of change - such as a managed float - being appropriate at some interim point, if circumstances do indeed change sufficiently to justify it, but I would need rather more persuasion than is offered by Mr Yam's paper.

One wonders whether he would be presenting the arguments for change so lucidly had he been on the winning team in the chief executive election campaign. He has certainly bowled a googly to the victor!

Tony Latter, former Monetary Authority deputy chief executive, Harrogate, Britain