Architect of Hong Kong dollar peg takes Jake down a peg or two
If John Greenwood says I got it wrong then I got it wrong, end of story
“Jake van der Kamp’s article on the currency system operated by the Hong Kong Monetary Authority misrepresents Hong Kong’s linked exchange rate system (‘From a currency board to a banana republic manipulation’, January 23)”
Letters to the editor,
I have been taken to task by someone to whom I concede full authority to do so. If John Greenwood says I got it wrong then I got it wrong, end of story.
Greenwood, as many readers will recognise, is the chief architect of the peg, our linked exchange rate to the US dollar.
As the Hong Kong dollar’s exchange rate progressively weakened from late 1980 onwards he became convinced that its foundations were fundamentally adrift as it had no domestic monetary anchor. He regularly published analyses along this line in the bimonthly Asian Monetary Monitor, which he founded in 1977.
When the currency weakness then became collapse in late 1983, the government called on him in some desperation for advice and he recommended a currency board link to the US dollar.
It was adopted and became the cornerstone of the financial stability that in subsequent years produced an unprecedented growth of prosperity.
Greenwood is now based in London, where he is chief economist for an investment management company, Invesco. He regularly visits Hong Kong and still sits on the Hong Kong Monetary Authority’s currency board sub-committee.
And he has now taken me to task for saying that the HKMA manipulated the HK dollar to US dollar exchange rate rather than let the currency board workings of the peg do their job.
I stand corrected. I should not have called it a manipulation. I have gone back over my work and I now accept that the system of full convertibility of banknotes and bank reserve deposits at a fixed exchange rate, fully backed by foreign currency reserve assets, is still in place.
In excuse, a poor one, I can only say that I applied to the present case a danger that I see looming in the future.
Let me explain. During the 1997-98 financial crisis I was an investment analyst covering a number of Asian countries in which monetary authorities had proclaimed they would forcefully defend their currencies against foreign speculators. They all failed. The speculators took them all out.
In subsequent meetings with clients in Europe and America I occasionally asked why there had not also been a stronger attack on the HK dollar.
The usual answer ran something like this: “Well, Jake, a currency board may not be the best thing at all times but it’s a real monetary system and not easily broken if you stick to the rules. Those other places were just manipulating their currencies and fooling themselves that they were big players. They were not.”
We did indeed stick to the rules. They require that if people want out of HK dollars then you let them all out until interest rates go sky high and attract them back in again. That’s what we did and that’s why the peg survived the test. We paid for it with a prolonged period of deflation, and it hurt, but we stuck it out.
Now, however, with HK dollar having traded briefly on the weaker side of the peg, I hear talk emanating from the HKMA about the enormous war chest it has built up in case anyone tries to get smart with us and about how George Soros, he ain’t that big no more – just let ’im try it and see what happens to ’im.
That’s the sort of talk of I heard from the Bank of Thailand back in 1997. The truth is that we ain’t that big, not really, and particularly not if Hong Kong people lose confidence in the peg, which they may do if we if we just emulate that rough, tough Thailand talk and abandon peg discipline for Thai-style market rigging.
Which is also why Greenwood was quite right to set me straight with a good ticking off in letters to the editor.
While we stick with the discipline of the peg let us have no allegations that we have not done so. It is important that people, both at home and abroad, know we still have a sound monetary system.
Message received, John.