Techno-coloured coat to Joseph's dream peg
Jake van der Kamp
Had the privilege of a chat with Joseph Yam Chi-kwong yesterday, and I suppose you think I asked him whether the peg would stay.
Well, I didn't. Might as well ask a priest if he believes in God as put that question to the chief of the Hong Kong Monetary Authority.
But he raised a few points of interest that I think worth mentioning. My pardons to those of you who think the following obvious.
The first is his response to those critics who say he tinkers too much with a pure currency board system and should let it operate in the straight mechanical way it was meant to operate.
I've heard the argument in investment centres around the world, and I can quote it for you word for word. It runs like this.
'We understand a currency board now, and if he runs it as a currency board then we'll leave him alone; but if he toys with it to relieve the pain of high interest rates, which currency boards occasionally bring, then we'll jump on the HK dollar.
'And look what he's doing. Every day he's playing with clearing balances and liquidity adjustments.' Mr Yam's riposte is that his critics are speaking of a currency board as it was first devised in the 1920s, when transactions were made and cleared in cash. But that is not the way things are done today. Money is moved and cleared electronically, at the push of a button.
So it is all very well to describe a currency board in the classical way - I'll print you HK$780 if you give me US$100, and if you want your US$100 back I'll take your HK$780 in return and rip them up.
It is simple, easy, and look, I've never touched the foreign reserves.
But that is no longer the way it happens. The HKMA concentrates on the aggregate clearing balance of the banking system because in an electronic age this is where the mechanism of a currency board operates.
The HKMA also does so because it has been given the dual authority of being in charge of the clearing system. It is not purely a currency board exchange agent.
But HK dollars are still only created when US dollars are given in exchange. And when banks take advantage of the HKMA's liquidity adjustment facility (LAF), they can only do so by selling the HKMA its own Exchange Fund bills, which are backed by foreign assets.
There was undoubtedly a problem here last October, when some banks were taking advantage of the LAF to speculate against the HK dollar. Mr Yam shut the window to those he deemed speculators and it caused a temporary dislocation of the system. Guidelines have now been published on what the HKMA considers overly frequent use of the facility.
So it still is a currency board, says Mr Yam, but one adapted to the 1990s because it had to be.
I don't profess myself the world's greatest monetary expert. Let others debate it. I think it is a reasonable defence.
His other point worth mentioning is that Hong Kong, Taiwan and the mainland between them have more than US$300 billion in foreign reserves. This is not to mention US$250 billion for Japan and generally high levels elsewhere in Asia as well.
Yet because they have never developed liquid fixed-income markets in their own currencies, these reserves are steered into fixed-income instruments issued by wealthy Western countries who do not have as crying a need for the money as Asia does.
Isn't it about time something was done to remedy this misdirection of resources, perhaps by establishing a proper payments system and other required mechanisms across the region? Good question, but I still think it will founder on one inescapable obstruction.
Give an insurance company with Asian-currency liabilities a good Asian-currency bond to set against those liabilities and it will be snapped up and never see the light of day again.
It will take an enormous amount of these things to create a liquid secondary market.