The currency peg, in its existing form, has become a major obstacle to Hong Kong becoming competitive, leaving it with an overvalued currency and excessively high interest rates. We now have a flood of Hong Kong residents going to Shenzhen - or even Tokyo and Bangkok - for shopping, entertainment, and basic services. This process has started to 'hollow out' the domestic economy, with jobs and businesses being lost as our competitive position is eroded. Yet, the currency peg is such a sacred cow that few in Hong Kong dare to publicly raise doubts about its continuation. The peg was a masterstroke when it was introduced in 1983, providing stability at a time Hong Kong faced a crisis arising from two developments. The first was poor regulation, reflected in financial scandals which triggered several banking collapses in the early 1980s. The second was uncertainty over the 1997 handover of sovereignty to the mainland. But that was yesterday's crisis. Today, financial institutions in Hong Kong are strictly regulated and supervised, and the 1997 transition to Chinese sovereignty has passed smoothly. What we face now is a different kind of crisis: the worst recession we have experienced since the end of World War II. The recession is structural rather than cyclical, meaning the root of the problem is being uncompetitive and is unrelated to a business cycle. In Hong Kong, it is obvious that businessmen no longer can cope with the high property costs and over-valued currency. These are the two big roadblocks to becoming competitive. Lay-offs, salary reductions and other cost-cutting measures are under way, but there is a limit to what can be done while interest rates and the currency are too high, and too much has to be paid for housing and rents. If Hong Kong property prices came down sharply, we could regain our competitive position. The problem is that high property prices have become a foundation of the system. Hong Kong's Government, banking system and many of its people simply cannot afford to see a swift and sharp drop in real-estate prices. Despite being down sharply from its peak, Hong Kong property remains among the most expensive in the world - and it seems that will remain the case for many years. If property prices cannot be adjusted quickly enough, then we must consider the possibility of devaluing the Hong Kong dollar. Devaluing the currency does not mean we have to abolish the linked-rate arrangement. We could repeg the Hong Kong dollar at a cheaper rate to the US dollar, for example. Or we could repeg it to a basket of currencies - for example, the currencies of the US, Japan and the mainland, our main trading partners - in such a way it ends up about 25 per cent cheaper than it is today. What if we simply float the Hong Kong dollar? Countries such as Singapore, Thailand and Korea have floating currencies, which have been allowed to fall sharply, and these countries have been able to adjust faster than Hong Kong. Floating the currency also would give us more flexibility in setting interest rates, which currently have to follow those in the US. Indeed, the US Federal Reserve Board's recent decision to let interest rates stay unchanged is a setback for Hong Kong, which suffers from a very high real interest rate, in view of local deflation. The danger is that US rates may eventually go up instead of down, in view of surprisingly strong economic numbers in America. Of course, if the Hong Kong dollar is floated, there is a higher risk of chaos arising from attacks by currency speculators and manipulators. The main point is that we have a big problem because the Hong Kong dollar is over-valued, so we have to consider a devaluation. How a devaluation could be achieved, through a repeg or by letting the currency float, is something the Government has to decide after careful study. What happens next? I don't believe that foreign speculators or manipulators can force Hong Kong to change its currency link with the US dollar. The currency board mechanism is strong, and the Government has powerful resources that allow it to defeat the speculators, as we saw last year. Hong Kong's currency can only be devalued if the Hong Kong people and Government come to the conclusion it is in their interest to have a cheaper currency. I think it is inevitable that more and more people will question the currency arrangement if the economy does not improve within 12-18 months. For the time being, the government appears unlikely to take any initiative on the currency, given its fear of instability. It would take immense political courage to tamper with a currency system that has served Hong Kong well. Until recently, I was a strong supporter of the currency peg, because I could see its usefulness at various periods of Hong Kong's history. But bear in mind that many economists expect Hong Kong's economy to shrink another 3 per cent or so this year, after a contraction of more than 5 per cent last year. We need to ask ourselves whether we are relying on yesterday's tool to tackle the different job we have to do today. Mr Cheah is managing director of Value Partners, a fund-management firm in Hong Kong.