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  • Aug 23, 2014
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CURRENCIES

Pegging Hong Kong dollar against yuan 'could take years'

Economist who fathered current system says mainland currency can only replace greenback when it is fully convertible and widely used

PUBLISHED : Tuesday, 30 April, 2013, 12:00am
UPDATED : Tuesday, 30 April, 2013, 4:48am

The yuan will eventually be a feasible currency for Hong Kong to peg its dollar against, in place of the US dollar, said John Greenwood, known as the "father of the Hong Kong-dollar peg".

However, Greenwood said, the yuan must be fully convertible and widely used before that day comes, which could take "many years".

The chief economist at Invesco Asset Management defended the existing peg in a speech on "Optimising Hong Kong's Currency Strategy" to the Hong Kong General Chamber of Commerce.

There was no better currency that could replace the US dollar at present, said Greenwood, who has been a member of the currency board operations committee of the Hong Kong Monetary Authority since 1998.

When the yuan became a reserve currency and was widely held by local people and foreigners, then it could be an anchor currency for the Hong Kong dollar, he said.

But foreigners on the mainland were not even allowed to hold yuan deposits, he said.

"No country ruled by a communist party has ever permitted free capital flows," Greenwood told reporters.

No country ruled by a communist party has ever permitted free capital flows

The existing peg is being debated because quantitative easing by the United States brings inflation to Hong Kong.

Since the currencies are linked, low US dollar interest rates will inevitably be mirrored in the city, keeping the Hong Kong dollar low and leaving the city vulnerable to imported inflation from the mainland, since the yuan would strengthen relatively.

Discussing how to optimise the peg, Greenwood said the government had rolled out "macroprudential" tools, such as getting banks to reduce the growth of lending, which were supplementary to the system.

Domestic loan growth, nearly 30 per cent a year in 2009 and 2010, had fallen to a single-digit rate at present, he said.

Inflation would not go on rising with those macro measures in place, he said.

Raymond Yeung Yue-ting, a senior economist at ANZ Banking, said when the yuan became a currency that inspired wide confidence, as well as a global reserve currency, it could become an anchor for the Hong Kong dollar.

Hong Kong's currency peg was introduced in October 1983 on the advice of Greenwood and other economists. The HKMA, the city's de facto central bank, buys or sells Hong Kong dollars in the market to keep the local currency within a band of HK$7.75 to HK$7.85 to the US dollar.

With low US interest rates causing inflation and asset bubbles in Hong Kong, Joseph Yam Chi-kwong, the HKMA's former chief executive, published a paper in June last year saying it was time to review the peg.

Yam said Hong Kong needed "a continuous and vigorous intellectual exercise to consider whether the monetary system is serving the public interest".

"There is no doubt the [peg] has, for almost 30 years of its existence, been a pillar of stability for Hong Kong, but there are costs involved," he wrote.

"As with all jurisdictions operating with a fixed exchange rate, it is not possible for adjustments to economic shocks of all descriptions to work through the exchange rate."

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impala
I have heard Mr Greenwood patiently explain his mantra about how we cannot peg to the RMB until it becomes fully convertible many times now. And formally speaking, he is right.

But if we can peg the HKD to the USD at 7.8, then we can also peg it to the USD at 6.x, or just at whatever the RMB to the USD is at any day. We don't need to have full RMB convertibility for that. We won't peg to the RMB directly, we only use it as a reference point. And as long as the RMB is pegged (ok, managed appreciation) to the USD, this will work just fine.

That would turn the HKD into an RMB proxy currency. We can debate whether that is desireable, especially with regards to the capital inflows that this may result in, and the political implications for the HKMA. But please Mr Greenwood, stop telling us that it is impossible.
rease.92
Just go ahead, replace the Hong Kong dollar by the yuan and remocve all borders and physical obstacles between Hong Kong and Shenzhen. Hong Kong is owned by the mainlanders anyway now. The foreigners move out of the property market and move away, and the party officials, their families and friends control politics, and the economy and buy property after property with their bribe money.
And while you are at it, lift all limitations on the country parks.
Flatten all mountains, cut down all the trees and sell the timber. Cover all streams. Build first parking lots for tourist busses and then luxury appartments and more retail shops.
Dump old containers and trucks on empty lots, burn down squatter areas, close down daipaidangs, put all beggars into busses and dump them in Shenzhen.
(if you find sarcasm, keep it)
HK-Explorer
Even if HK re-pegs at 6.7 to 1 it would be a good move by the monetary authority to try and bring HK slightly in line with China RMB.
right now the HK $ is just a little bit too far off due to US and will cause massive issues once interest rates increase if they do not get the exchange rate set to a good level.
Some may say then the market will keep on attacking the rate looking for a re-peg. But I think the government has enough capital to maintain a 6.7 exchange rate and should not be the excuse they give for mainlining such a bad rate for so long..
taihang
The government does not need capital to defend an undervalued currency, as it can "print" more if it threatens to appreciate. They are already doing this, and have performed numerous market interventions in the recent past.
What you need to defend an undervalued currency is not capital, but a blatant disregard for your own population, essentially forcing instability onto nominal prices, causing bubbles and chaos, in order to defend your misguided policy and profit from it.
hodfords
As the RMB is not freely-convertible yet it would not be possible to peg to it. However, it doesn't mean that we cannot peg to a basket of currencies with RMB as a heavyweight.
The Hong Kong dollar is grossly undervalued (probably by ~20-30%) which is the cause of many problems including our property bubble, parallel traders, etc. Our best and fatest solution right now is to repeg to the US dollar at 6.1 (which is the original rate of the peg in 1972).
Lastly, "Macroprudential" is a word coined to deceive - Why not call it "Macrodeception"?
it does not address the root of the problem and goes against free market.
John Adams
Has anybody read "Currency Wars" by James Rickards ?
This is a book Tom Holland may care to comment on in a future column
captam
@"No country ruled by a communist party has ever permitted free capital flows," Greenwood told reporters."
Well thank God for that! Globalization and totally unrestricted capital transfers were the root cause of the financial mayhem now afflicting Europe and USA. It allowed for the destructive casino banking witnessed this past decade....... which after a temporary stall has been resurrected and now thrives again.
Greenwood also shows his ignorance by still inferring that China is still "communist". The Communist Party of the People's Republic is but a name.
 
 
 
 
 

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