Pegging Hong Kong dollar against yuan 'could take years' | South China Morning Post
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  • Mar 30, 2015
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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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