Given the intense pain that the Hong Kong Government's successful defence of the US dollar peg has inflicted on the local economy, it was probably inevitable that Financial Secretary Sir Donald Tsang Yam-kuen would offer to review the techniques used to defeat the recent wave of speculative attacks. His planned consultations with business leaders, and others who have borne the brunt of this pain, should help reinforce their support for the peg and ensure that the SAR presents a united front against any future attacks by speculators. But Sir Donald has hinted at something more with his promise to ensure 'the ramifications for Hong Kong as a whole will be less' during any future crisis. If this can be achieved, it is welcome. But it has to be remembered there is no easy way of defending a currency against speculative attack. It is a painful business and one which is only made more difficult by any hint of concern for the economic consequences involved. One reason why the SAR won its recent battle with the speculators is because the Hong Kong Monetary Authority is widely seen as willing to bear whatever price is necessary in order to protect the peg. That is an image this review must do nothing to compromise. Already a few economists have warned the Monetary Authority may have exposed a chink in its armour by, only a day after it defeated the speculators, making more Hong Kong dollars available to banks in an effort to bring interest rates back down to less painful levels. Some investors claim this is a sign of weakness and shows a reluctance to bear the pain of keeping rates high for prolonged periods. What this actually shows is that the authority has already done as much as it can to minimise the economic fallout within the scope of its over-riding mission to protect the peg. There is nothing wrong with reviewing its techniques to see if they can be improved. But nothing must be done that could be interpreted as a sign of weakness.
