10 Years Ago
HONGKONG (March 17): THE government has examined the possibility of repegging the Hongkong dollar to a basket of currencies but found it an unattractive, according to acting Secretary for Monetary Affairs Joseph Yam Chi-kwong.
A major deterrent, he said, was that the local currency could become an easy conduit for speculation in the Chinese yuan under that arrangement. Hongkong's strong trade ties with China would make the yuan a heavy element in any basket that the territory might choose, he added. The monetary chief was convinced that currency speculators, who are not able to gamble on the yuan because of its inconvertibility, would almost certainly do so if it was tied to the freely exchanged Hongkong dollar.
Mr Yam emphasised that the study was not a recent one, rather that the highly sensitive exercise had not been disclosed until now.
Pegging to a basket, the critics say, would avoid hinging the territory's currency stability to the fate of one currency. According to Mr Yam, three other important factors are working against anchoring the currency to a group of currencies.
First, the anchor should be known as easily grasped by the users if it is to give a sense of stability. 'A basket of currencies could be quite difficult to grasp,' he said. 'That sense of stability is lost.' Second, the current note-issuing arrangement could run into undue complications. Under the current peg, the note-issuing banks have to deposit with the Exchange Fund the US dollar equivalent, at the rate of US$1 to HK$7.80, of the sum they issue in Hongkong dollars. If pegged to a basket, the note-issuing banks would have to deposit a group of currencies instead. The constantly floating worth of the Hongkong dollar to these currencies would make deposit arrangements very complicated.
Third, arbitrage, which has been instrumental in keeping the local exchange rate close to the peg level, would become impractical when conducted simultaneously by way of a number of currencies.