HK dollar peg to greenback 'must remain'
Hong Kong should stick to its currency peg with the US dollar and should not switch to a peg with the yuan instead, a senior mainland official advised yesterday.
Zhang Anyuan, a director of fiscal and financial policy research at the National Development and Reform Commission, said at a seminar hosted by the Bauhinia Foundation that the status quo should remain at the moment.
'If the Hong Kong dollar were to be pegged with the yuan, this will reduce investors to hold the yuan, but they may hold the Hong Kong dollar instead,' Zhang said. 'This will lead to the internationalisation of the Hong Kong dollar instead of an internationalisation of the yuan.'
He said the economic cycle and monetary policies of Hong Kong and the mainland were different, which also meant the Hong Kong dollar should not be pegged to the yuan. China stepped up efforts to boost the international status of the yuan from June last year that has allowed companies to settle trades in yuan in Hong Kong and relaxed some rules to enable companies in the city to issue bonds, insurance policies or funds denominated in yuan.
'We want the internationalisation of the yuan to follow a smooth and stable process,' Zhang said.
Some commentators have called for the Hong Kong dollar to be pegged with the yuan instead of the US dollar. Louis Tse Ming-kwong, a director of VC Brokerage, said such a move made sense in the long term.
'The US dollar is so weak and the peg with the US dollar has led us to having a weak currency too,' Tse said. 'In addition, there are increasing economic and trade relationships between Hong Kong and mainland China.
'Hong Kong is now part of China, so it makes sense for the Hong Kong dollar to be pegged with the yuan. This may not happen immediately but it is possible for the long term.'
Critics also said the currency's peg with the US dollar, which had lost more than 20 per cent of its value to the yuan, led to higher prices of imported mainland products, resulting in inflationary pressures for the city's food and goods.
Zhang conceded that Hong Kong would suffer import inflationary pressure as a result of the continued appreciation of the yuan.
Under the peg system, the Hong Kong dollar's exchange rate is fixed against the US dollar, and to manage this peg, Hong Kong is obliged to follow US interest rate movements, which means the government is not free to raise interest rates to curb inflation.
The peg has thus left the city in an awkward situation as interest rates remain low, even though inflation is rising.
Speaking at the same seminar, Hong Kong Monetary Authority chief executive Norman Chan Tak-lam said the city would have huge opportunities in conducting yuan business.
'Mainland China is the world's second-largest trading economy after the US, accounting for 9 per cent of global trade, of which, Asia accounts for more than half,' Chan said. 'Hence, the potential for yuan as a currency for trade settlement is huge.'
Chan said China's exports to South Korea soared to US$54 billion last year, up 167 per cent from 2003; while exports to Japan rose to US$98 billion, up 65 per cent from 2003. China's exports to Asean countries increased even further, by 244 per cent, to US$106 billion.
'These growth rates suggest there is ample scope for a wider use of the yuan for trade settlement in the region,' he said.
