According to two eggheads from DBS Bank, the Hong Kong dollar peg in its present form almost definitely has a sell-by date on it. The views of Friedrich Wu and Jill Wong do not necessarily reflect the views of the Development Bank of Singapore. Writing in the July-August edition of International Executive Mr Wu and Ms Wong argue that in the short term, after 1997, the Hong Kong dollar has a degree of longevity. Mr Wu is a DBS vice-president and is head of the bank's economic research department. Ms Wong is a senior economist. The Hong Kong dollar is safe as long as the Chinese yuan is not fully convertible. Full convertibility is in prospect only in the year 2000. In the period before 1997, Mr Wu and Ms Wong argue it would be difficult to abandon the link because confidence, in relative terms, is already shaky. The priority in policy is to ensure a smooth handover. In the period from 1997 to full convertibility of the yuan, the authorities will have a full plate of political reforms to attend to. There will be a series of legislative reforms, issues linked to the provisional legislature, the Court of Final Appeal and new elections for the legislature in 1998. Besides, say Mr Wu and Ms Wong, the Chinese Government in this period will be even more committed to building up confidence and stability in Hong Kong's post-1997 socio-economic system. It will want a strong demonstration of its credibility and competence compared to the former colonial regime. In addition, the financial regulatory system is firmly established and is capable of handling affairs with the aid of a strong Hong Kong Monetary Authority. After the year 2000, however, the agenda is set to change. The Hong Kong dollar peg has a downside as well as an upside. Since its inception in October 1983, the confidence-inducing properties of the peg have provided a firm bedrock of stability on which the territory was able to thrive economically. After 2000, there are a number of compelling reasons why the Hong Kong dollar peg will need a thorough re-examination. Already the territory has seen problems regarding the divergent growth and inflationary cycles between Hong Kong and the United States. Hong Kong's economy was in a buoyant state in the period 1991 to 1993, at a time when the US was coming out of a big downturn. The US went into an interest rate cut mode, which was when the Hong Kong economy needed tempered monetary policy. The declining interest rates in Hong Kong set asset inflation on fire in an unprecedented liquidity boom. This divergence between Hong Kong and China will be even more pronounced as the territory's economic path will increasing be led by China's light. Mr Wu and Ms Wong conclude that while exchange rate stability is expected to remain a key priority of the Hong Kong Government, the crucial long-term issue is to maintain a balance between growth and macro-economic stability. 'This could make way for a more refined monetary management system in Hong Kong and there is some belief that a managed float system would be the most probable, should the Hong Kong Government decide to change the exchange rate regime some time in the early 21st century,' Mr Wu and Ms Wong say. Such a turn of events might also provide a safety valve against pressure building up on the mainland to force a merger of the Hong Kong dollar and the yuan. There is a danger that the Hong Kong dollar might, in the future, become seen as a safe haven currency for mainland interests. In fact, the fixed-rate peg system tied to the US dollar, and therefore US monetary policy, can actually encourage this in periods when US and China's economic cycles are divergent.