The high costs of our link to the greenback

PUBLISHED : Monday, 22 November, 2010, 12:00am
UPDATED : Monday, 22 November, 2010, 12:00am

With inflation on the mainland the worst in a decade, especially the soaring cost of food, Beijing is concerned about political stability, and is set to impose drastic measures, including price controls.

The latest figures for Hong Kong's consumer price index have yet to be released, but anecdotal evidence suggests that the prices of daily necessities such as vegetables, eggs, chicken and fish have been going up.

According to the Nomura Food Vulnerability Index, which ranks countries and regions in terms of their vulnerability to food prices, Hong Kong ranks ninth out of 80 economies. Singapore, however, is much less vulnerable, ranking 49th.

In terms of the percentage of gross domestic product spent on food, Hong Kong is No 1 - we spend 4.4 per cent of our GDP on importing food. That compares to the 1 per cent spent by Singapore. Figures for South Korea and Japan are even lower.

That is a reflection of how dependent Hong Kong is on imported food, and the mainland is by far its most important source.

The consumer price index created by the Census and Statistics Department is also somewhat misleading. For example, it showed that overall consumer prices rose by 2.6 per cent in September, but the CPI (A), for the bottom economic sector of society, actually rose by 3.2 per cent.

And even that figure understates the problem, because it does not reflect the fact that the poorest people in any society spend a disproportionate percentage of their income on food.

Hong Kong is caught between a rock and a hard place. The Chinese currency is rising and the US dollar is falling. This means that while the food Hong Kong imports from the mainland is increasing in cost, the currency that it uses to pay for it is dropping in value.

While it made sense in 1983 to peg the Hong Kong dollar to the US dollar, since the United States was the dominant economic power, today China is by far the most important trading partner for Hong Kong.

The peg was instituted because the Hong Kong dollar was falling as a result of concern about the then colony's post-1997 future. Today, the situation is different. If the peg is removed, the Hong Kong dollar is likely to rise, not plummet.

And with the Hong Kong dollar pegged to the US dollar, we have no room to manoeuvre where interest rates are concerned.

While it may be good for the United States to keep interest rates close to zero, it would probably be better for Hong Kong to have higher interest rates. But because of the dollar peg, Hong Kong cannot have its own monetary policy.

It has little choice but to allow hot money to pour in and for property prices to soar, creating a bubble.

The obvious solution is to remove the US dollar peg and peg the Hong Kong dollar to the renminbi. But, as has been pointed out, this cannot be done until the Chinese currency is totally convertible.

Yet, this doesn't mean there is nothing Hong Kong can do. Instead, it could change the peg from the US dollar to a basket of currencies, which will include the dollar, the renminbi, the euro, sterling as well as other currencies.

That would not solve all of Hong Kong's problems, but it would ameliorate the problem of the declining value of our currency vis-a-vis the renminbi. It would also give Hong Kong much more room for manoeuvre.

As Joseph Stiglitz, the Nobel Prize-winning economist said recently, the peg may have worked well for a long time but 'the current system is not viable'.

Hong Kong needs to remove its head from the sand and take action. The sooner, the better.

Frank Ching is a Hong Kong-based writer and commentator.