Financial services secretary defends Hong Kong dollar peg

HKMA intervened in market on three occasions on Thursday

PUBLISHED : Friday, 02 November, 2012, 2:52pm
UPDATED : Friday, 02 November, 2012, 7:49pm

Hong Kong has no plans to change its currency peg against the US dollar, the financial services secretary said on Friday, dismissing talk of the authorities rethinking policy after being forced into heavy sales of the Hong Kong dollar to curb its strength.

Chan Ka-keung, Secretary for Financial Services and the Treasury, asserted Hong Kong’s commitment to the pillar of its monetary policy during a Legislative Council panel discussion on financial affairs and housing that was available via webcast.

“We have no plans to change the Hong Kong dollar peg,” Chan said in response to a question from a legislator.

The 29-year-old peg has come under pressure recently, along with other Asian centres, becoming favoured destinations for funds unleashed by major quantitative easing measures in the US, Europe and Japan.

During the past two weeks, the Hong Kong Monetary Authority (HKMA) sold a total of US$3.5 billion worth of Hong Kong dollars into the market via nine interventions to curb the strength of the local currency.

Established in 1983, and the last major change to the peg was in 2005 when the trading band was widened to allow the Hong Kong dollar to trade between 7.75 and 7.85 against the US dollar.

Under the peg, the HKMA is obliged to intervene when the local currency hits the upper or lower limit.

In June, Joseph Yam Chi-kwong, an adviser to China’s central bank and a former Hong Kong Monetary Authority chief, suggested Hong Kong may want to consider ditch its exchange rate target, fuelling speculation that the peg might be abandoned.

However, most analysts believe the peg remains the most suitable system for Hong Kong for the time being, given the benefits of switching to another currency regime are unclear.

“We continue to expect the HKMA to maintain the integrity of the HKD peg and do all it needs to in order to keep the system intact,” Paul Mackel, HSBC’s head of Asian FX research, said in a recent report.

Many analysts expect the big change in policy will only happen when the yuan becomes freely convertible, in which case the Hong Kong dollar could be re-pegged against the Chinese currency.

Since it was adopted, the peg has survived a number of speculative attacks as well as regional and global financial crises, and authorities have continued to reiterate their commitment to the peg.

In the meantime, the most worrying aspect of the surge of funds into Hong Kong has been the effect on property prices, which have risen about 20 per cent in the first nine months of this year, with even small and medium-sized units climbing some 21 per cent.

Fearful of the social impact, the city introduced new measures to curb runaway prices last Friday, including a 15 per cent tax on overseas buyers and an increase of the stamp duty on short-term transactions.

The Hong Kong Monetary Authority (HKMA) stepped into the currency market during New York hours on Thursday, its third intervention for the day, as the local currency repeatedly hit the strong end of its trading range.

It sold HK$2.751 billion (US$355 million) in Hong Kong dollars in the latest move, bringing the total injection for the day to HK$7.4 billion, data showed.The three interventions bring the total number of interventions from the HKMA in the past two weeks to nine.

According to Reuters data, the latest intervention will lift the aggregate balance – the sum of balances on clearing accounts maintained by banks with the HKMA – to HK$175.83 billion on November 5.

The Hong Kong dollar is pegged at 7.8 to the US dollar but can trade between 7.75 and 7.85 to the US dollar. Under the currency peg, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.