Hong Kong peg 'could last another 20 years', says its designer John Greenwood

The economist behind the local currency's link to the US dollar says mechanism still needed and that a tie to the yuan is unlikely soon

PUBLISHED : Monday, 14 October, 2013, 12:00am
UPDATED : Monday, 14 October, 2013, 3:05pm

The Hong Kong dollar's peg to the US dollar could easily be in place for the next 20 years with a potential switch to the yuan an unlikely prospect, according to John Greenwood, the economist who designed the currency board system that marks its 30th anniversary this week.

"A number of people take the view that the [yuan] could become fully convertible and a competitor international reserve currency with the US dollar and in that case, it might make sense to peg to the [yuan], but, in my view, that is many, many years away," Greenwood told the South China Morning Post.

Asked if he thought the peg could feasibly mark 50 years of operation, he said: "Given current conditions in China, I think that is true.

"It will take China a very, very long time to achieve that sort of status for its currency and so I don't envisage any near-term factors that would render the linked exchange rate system past its sell-by date."

The Hong Kong dollar's peg was created on October 17, 1983, after a slide in the value of the currency on growing investor concern at the time over talks between Beijing and London on the return of the city to mainland rule.

The currency had fallen as much as 32.5 per cent between January and October, triggering an inflation spike as the price of goods rocketed. It culminated in the so-called "Black Saturday" crisis that forced the Hong Kong authorities to intervene and introduce the peg on Monday, October 17.

Greenwood's analysis of the options available was the basis for the peg's introduction and remains core to why it is likely to persist.

Hong Kong's lack of a central bank meant the economy was operating without a mechanism to control either the price or quantity of money.

Creating a central bank was not viable, as making major institutional changes in the run-up to the handover had been ruled out.

Greenwood's brainwave was to opt for a peg that would anchor the price of money, while leaving the flexible Hong Kong economy to adjust to the new pricing level.

Launching an independent Hong Kong central bank now is arguably as unlikely as it was back in 1983, which means an external monetary anchor is still needed.

"It might conceivably become redundant if Hong Kong ceased to be an export-oriented economy with a very large financial centre, but that is inconceivable so I don't envisage any near-term change in those fundamentals," Greenwood said.

Greenwood, the British-based chief economist of fund firm Invesco, credits the work of others - particularly former Hong Kong Monetary Authority chief Joseph Yam Chi-kwong and his successor, Norman Chan Tak-lam - for strengthening the mechanism to help it weather batterings of emerging markets in the 1980s and 1990s, the Asian financial crisis of 1997-98 and, more recently, the global financial crisis of 2007-08.

And he is confident that the current troubles facing India and Indonesia, which have borne the brunt of concerns about deficits and capital flight ahead of an anticipated ending of the US Federal Reserve's quantitative easing programme, will not affect Hong Kong.

"They have maintained the discipline," Greenwood said, citing Hong Kong's use of so-called macro-prudential controls to adjust to the capital flows unleashed by quantitative easing.