WHY IS IT when people talk peg-talk in Hong Kong that so many of them model their arguments on bygone literary giants - all words and grand theory but few facts backed by hard data? When you talk about the linked exchange rate system to the US dollar you are talking finance, a field where arguments on the value of anything are numeric, not literary, and where those numeric arguments are best formed when expressed in tables and charts of hard statistics. I shall grant you that I am not doing it here. Newspapers deal in words and if I submitted a column consisting only of charts bearing terse descriptions such as 'Look at this!' in the way I used to do it as an investment analyst, I would soon have the boss ringing up to my perch in the Foreign Correspondents' Club. But it is frustrating to read screeds of text saying that Hong Kong must de-peg or re-peg because (in whatever it is) we are out of line with the rest of the world when the sum total of evidence adduced rarely progresses past anecdotes. Prove it, folks. Give me some hard statistics I can chew. Yet it just gets worse. A recent scare story has it that the peg must go because the border to the mainland may soon be open 24 hours a day. Ignoring that it is already open 17 hours a day by rail, are we really to believe that the peg is only held in place because people cannot make it to Shenzhen at 4am? This column lacks the space to review the entire debate but let us go back to the basics of how it works. Look at the triangle I have marked. The hard rule says that you can have two points of this triangle but not all three. If you decide as a government to control your currency's interest rates and to leave your borders open to capital flows (two points of the triangle) then you must let the marketplace determine the exchange rate of your currency. This is the model on which the United States operates. If you decide that you want instead to control your exchange rate while leaving your borders open to capital flows you must let the marketplace determine your interest rates. This is what we have done in the best way of doing it, a currency board link to a soundly managed currency. And if you decide you want control of both exchange rate and interest rates, then you had best close your borders to capital flows and pretend you live on Mars. It works but never well. Guaranteed failure, however, awaits the practice of fixing both exchange rate and interest rates while leaving the borders open. It is akin to screwing down the safety valve on a pressure cooker and the explosion you inevitably get from this is the one we had in the Asian financial crisis of 1997. Now, the facts are that we cannot in Hong Kong close our borders to capital flows and past attempts by our authorities to run the interest rate option have proved so inept that you would not leave them to run a booze-up in a brewery. Established interests have invariably found it easy to run roughshod over the required monetary discipline. We have the peg because we need it. Nothing has changed here, least of all the vacuous nature of the arguments for abandoning the peg. I would love to debate them but I need some substance first. Give me hard data, you pessimists. Graphic: jake11gbz
