Dollar peg has its drawbacks, but we have no alternative

Former central banker sends shockwaves through city by calling into question link to US dollar ...

South China Morning Post, June 13

I can picture our former monetary chief, Joseph Yam Chi-kwong, scratching his head yesterday. Since the peg to the US dollar was adopted in 1983, people of influence in this town have often called for its dissolution. Sometimes only Joe was there to hold the line with a firm 'No'.

Now he has himself come out to say that there are costs as well as benefits to the peg, that it is not cast in steel, and that we may have to consider modifying it at some point.

And what was the response but a resounding 'Oh no, we can't have that, Joe' from all the people of influence in this town. Sometimes you just can't win. Joe certainly hasn't been on a winning streak lately.

The monetary authority, however, has a committee that meets regularly to discuss how well the peg is doing. This has long included economist John Greenwood, who originally proposed the idea of a peg.

The committee has no qualms about discussing the peg's future. Its members would consider themselves irresponsible if they did not. But if they do it in public, they risk encouraging speculation against the peg, and then any worries they may have about its future could become a self-fulfilling sentence of doom for it.

If the monetary authority decides to drop the peg, it has to do it as a surprise. That's the way of monetary policy around the world.

And that's why Joe was out of line in publishing a paper calling the peg's future into doubt. The points he raised were perfectly legitimate, but his retirement from the monetary authority is still too recent. He should have had someone else write that paper. Silence should still be golden to him.

As everyone else has offered an opinion on Joe's thoughts, however, why not me, too? I am for keeping the peg exactly as it is, no exchange rate against a basket of currencies, no sliding this, no moving target that.

And the reason for my stance is the same reason we adopted the peg in the first place. I think there is no alternative or, rather, I am not confident that the only alternative has any real prospect of working.

Let's get it straight first of all that the Singapore solution of a managed float is no alternative for us. Singapore currency traders will submit themselves to government edicts that Hong Kong traders would instantly subvert. A wobbly peg might stay in its hole in Singapore. I doubt that it would do so in Hong Kong.

Let's remember here that the King of Singapore has real authority, while our equivalent can't even get his hotel expenses repaid without having to apologise. The Singapore government owns the Sing dollar. The US Federal Reserve Board owns the Hong Kong dollar.

The Fed owns it because what passed for our own monetary authority in 1983 had made such a shambles of trying to run an independent monetary policy that it had to run to America for the rescue that we call the peg.

How do we think that we can now manage to float what previously we could only sink?

It is in my view the key question, because the only real alternative for us is once again to adopt an independent monetary policy and all that it implies - statutory reserves, central bank discount rates and open market operations.

It could relieve us of such trials to which the peg has subjected us as soaring interest rates or unusually depressed ones and multi-year deflationary periods.

But it requires a central bank chief who will occasionally stand up to the government that appointed him and inflict monetary pain when all the politicians are screaming for relief.

Even Europe doesn't have a central bank like that. In its first real crisis, it has folded up at the very first political push and supplied everyone who has asked with massive infusions of painkillers.

Ours will do the same. We don't have the kind of government that can say 'No' to a big swing of public pressure or is willing to hire anyone empowered to say 'No' on its behalf, not with a Legislative Council and bosses in Beijing ready and able to undermine its every move.

Let's stick with the peg as it is, please. Bad as it may be, the alternatives are worse.