Foreign Exchange Market

Peg critics shown to be wrong, says Joseph Yam

PUBLISHED : Wednesday, 15 October, 2003, 12:00am
UPDATED : Wednesday, 15 October, 2003, 12:00am

The monetary chief points to HK's appreciating currency as evidence the link is not to blame for economic woes

Hong Kong's monetary chief used today's 20th anniversary of the currency peg to launch a vigorous defence of the linked exchange rate, saying last night that recent events had shown it was not to blame for the city's economic troubles.

Joseph Yam Chi-kwong, chief executive of the Hong Kong Monetary Authority, said although the currency had strengthened against the United States dollar over the past few weeks, there was no plan to change the system.

The peg has long been blamed by some for Hong Kong's persistent deflation, high unemployment and budget deficits. But Mr Yam, speaking at the Open University of Hong Kong, said such arguments had now been proved wrong.

'It seems, from recent events, that the very premise on which this panacea of exchange rate depreciation is based may be seriously flawed,' Mr Yam said. 'The market has, all of a sudden, chosen to ignore the continuing problems of deflation, unemployment and budget deficit and the possible implications of these for the exchange rate,' he added. It believed that if the Hong Kong dollar were allowed to float now, it would rise, he said.

He said many investors had been hoping it would depreciate, and had been taking short positions against the currency. Instead, the US dollar's plunge and an increasingly rosy outlook for growth in Hong Kong and the mainland had turned sentiment in favour of the local currency, he said.

As a result, the exchange rate strengthened to $7.7464 to the US dollar in spite of the monetary authority's purchase of US$125 million and sale of HK$969 million yesterday - the central bank's sixth intervention in the market in less than four weeks.

Mr Yam said it was anyone's guess what would happen if the dollar were allowed to float. 'We have no wish to find out,' he added.

Mr Yam addressed Hong Kong's overall economic situation and the structural problems the city faces, including unemployment and depressed property prices.

During a question-and-answer session, audience members peppered Mr Yam with questions about the dollar peg, the 70 per cent mortgage ceiling and closer ties with the mainland. One questioner inquired about de-pegging, to which Mr Yam replied: 'If the Financial Secretary asked me about it, I would say don't bother.'

Mr Yam also briefed journalists about the peg. He said there were ways to strengthen it but these had not been introduced.

'Every measure has its price. The price is that we are using our foreign currency reserves to support our basic currency. But the reserves are limited. So, if we are using too much of them, then we have to think about whether or not we have enough foreign currency when something suddenly comes up,' he said.

Additional reporting by Louisa Yan