Why Hong Kong still needs to peg its currency to US dollar

The Hong Kong Monetary Authority’s billion-dollar intervention to defend the Hong Kong dollar peg to the US dollar last week has reignited the debate on the city’s 32-year-old currency peg.

Bankers and analysts in general believe de-pegging from the US dollar is not an option. The only reason for the Hong Kong dollar to lose its peg to the US dollar would be to peg itself to the yuan and it’s too early for that.

Wilson Chan Fung-cheung, senior consultants at Hong Kong Institute of Bankers, said an unpegging at this point would mean the HKMA would not have to intervene, saving a lot of money.

“However, this may create more problems it solves,” Chan said, adding that a de-pegged Hong Kong dollar would have two choices for free floats. These are, being pegged to a basket of currency like the Singapore dollar, or being pegged to the yuan.

“The Hong Kong economy is too small to adapt to a free float. A currency-basket system lacks transparency. A peg with the yuan will not happen in the near future as the currency is not yet freely convertible,” Chan said.

BNP economist Mole Hau said in a report that in the long run, the Hong Kong dollar’s link to the US dollar is likely to be replaced by a link to the onshore yuan or the Hong Kong dollar being replaced by the yuan itself.