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SCMP Reporter

Hong Kong is likely to face uncertainty over the Government's commitment to the local currency's peg to the US dollar in August next year, according to the 1990 Nobel Laureate in Economics Professor Merton Miller.

 The University of Chicago professor yesterday said the uncertainty would be created by the residual discretion of the Hong Kong Monetary Authority in operating the currency board system.

 The authority has decided the exchange rate at which it guarantees to convert Hong Kong dollars into the US currency will be lowered to HK$7.8 per US dollar from $7.75 in 500 days, starting from April 1, this year.

 'As day 500 approaches, the HKMA can't say to the world that they are merely considering extending [the guarantee],' Professor Miller said.

 'That would be interpreted by the market that the HKMA was also considering not extending the put, which would send to the market a most unfortunate signal indeed.

 'When it comes to the continuation of the put, the HKMA thus faces a classic 'ride the tiger' problem: it can't get off.'  Mr Miller said the downward adjustment in domestic prices resulting from keeping the peg intact would not help restore Hong Kong's competitiveness.

 'For Hong Kong, the downward pressure on price levels needed to restore competitiveness is necessarily limited,' he said.

 The professor said a currency board system ruled out a devaluation of the Hong Kong dollar as well as the monetary inflation that usually lead to devaluations.

 'Remember that a currency board is not a central bank; it cannot just decide to pump up the money supply when it sees a deficiency in demand,' he said.

 Mr Miller urged the HKMA to abandon all of its discretion in running the currency board.

 'As long as the authority observes currency board rules [domestic prices] will be on automatic pilot,' he said.

ECONOMICS 



HKMA viewed as 'riding the tiger' on peg