This much is certain: one day Hong Kong's pegged dollar currency system will be abolished. The question is whether the benefits of sticking with the discipline outweigh the costs. Nothing could be worse than doggedly defending a policy that is ultimately doomed yet delivers untold economic pain.
The strengths of Hong Kong's US dollar currency board are well known. Since its inception during the 1983 crisis it has delivered economic stability during unnerving times.
Macro economic policy was put on auto pilot. Investment and consumption choices were based on the one certainty that the value of money was fixed. Fire-tested in the 1997-98 currency crisis, the system was not found wanting.
However, the result of the inflationary boom in the 1990s has been an inevitable deflationary bust. A tight land policy and unhelpfully low US interest rates can be blamed for the pre-handover excess. Unfortunately, currency board rules do not include opt-out clauses for poor circumstances.
Changing the rules means changing the system. This boils down to three options: adopting a free-floating regime, re-pegging at a lower exchange rate, or adopting the US dollar as the SAR currency. None of the above offers a panacea and all involve significant economic and political hurdles.
With interest rates at historic lows there is no reason to believe that de-pegging would allow them to go even lower. As a re-export centre the SAR's trade competitiveness is not directly linked to the value of the local unit. In short, the main reasons for devaluing a currency are not present in Hong Kong.
