Hong Kong could switch to yuan, dump US dollar peg: businessman Allan Zeman
Lan Kwai Fong Holdings chairman Allan Zeman remembers the days before the dollar peg. Three decades ago he was head of trading firm Colby International, and the Hong Kong dollar was wildly volatile.
"You would quote a price in the morning and by the afternoon you could be down 15 per cent. Hong Kong almost came to a standstill," Zeman said, speaking about the pre-peg era.
The decision to peg Hong Kong's currency to the US dollar decisively solved the volatility problem.
"It settled the market, and at that point you could sell the product and worry about the mark-up on the product rather than speculation on the currency. So, for 30 years, the peg has brought stability," he added.
Back in those days, Hong Kong was a manufacturing hub. Goods were made in Hong Kong and distributed offshore, and typically priced in US dollars. Factory owners' costs were primarily in Hong Kong dollars because they paid wages and other production costs in the local currency. The peg eliminated currency risk in their dealings.
Thirty years later, Hong Kong is no longer a manufacturing town, but the peg is still useful from a commercial perspective.
Consider the export-import sector, which comprises about one-quarter of the Hong Kong economy, according to the Census and Statistics Department.
Exported goods are still overwhelmingly priced in US dollars, and the peg lets local firms work seamlessly in the local currency.
Stanley Lau Chin-ho, the chairman of the Federation of Hong Kong Industries, said local firms that exported to global customers submitted shipping documents to local banks, which would then process payment in Hong Kong dollars.
Because the Hong Kong and US dollars are linked, local firms can deal in both currencies, swapping easily between the two.
Hong Kong-headquartered industries often have significant local costs, the salaries of administrative staff, for example. Again, it helps to have the currency of costs pegged to the currency of revenues, which is almost always US dollars.
The retail industry, likewise, benefits from having the currency of its goods for sale in harmony with the currency in which it makes purchases in the global market. For example, shopkeepers are not forced to continuously change their sticker prices to adjust for daily fluctuations in the US dollar.
Then there is the matter of Hong Kong's financial services sector, which generates economic output of HK$310 billion annually, accounting for about one-fifth of the city's service economy, according to the Census and Statistic Department.
Finance definitely benefits from a stable currency. One need only look at the capital flight from the Indian and Indonesian markets when the rupee and rupiah dropped sharply, in the July-August period.
Investors holding local stocks and bonds did not want to see the US dollar value of their investment tank alongside the currency, a problem that Hong Kong has long managed to avoid with its dollar peg.
"Stability is key to Hong Kong's status as a financial centre," said Kelvin Lau, a senior economist at Standard Chartered. "The peg anchors confidence. This has served Hong Kong's industries well, particularly the financial services sector."
Most people in the business community believe the peg has served Hong Kong well.
The question is whether the city should remain pegged to the US dollar, or switch to linking to the yuan. Hong Kong is increasingly tied to the cycles of the mainland's economy, so it might as well adopt the mainland's interest rates, according to some analysts.
The Hong Kong dollar's peg to the US dollar has resulted in increased costs for Hong Kong manufacturers with production on the mainland, because their costs are in yuan and their prices are in US dollars. If there is a long fulfilment period, the yuan may fluctuate, increasing either costs or revenue. The Hong Kong dollar has weakened against the yuan by about 26 per cent over the past 10 years.
"Most exporters have production in the Pearl River Delta, for which they need to use yuan, for wages and buying in the mainland. Everybody knows that the yuan is going up … If we take an order from a US customer but the delivery is in three months, we calculate the rate of yuan appreciation. We will add a bit of surplus [to prices] as a kind of safety," Lau said.
Most agree that full convertibility of the yuan is a precondition for adopting it as Hong Kong's base currency, and most expect that that is where the yuan is heading.
Zeman thinks Hong Kong will forgo the pegged currency format and use the yuan outright. "It would make sense, given that Hong Kong is so tied to China."