The Government would probably opt for a 'managed float' if it scrapped the dollar peg, according to investment bank ABN Amro. 'We have ruled out dollarisation and a one-to-one peg with the [yuan],' the bank said. 'We view a managed floating system as the most appropriate policy option as against a re-pegging which does not offer the much-needed 'flexibility' that the financial secretary has advocated.' ABN Amro does not think Financial Secretary Antony Leung Kam-chung should remove the long-standing cornerstone of economic policy for at least nine to 12 months. 'It takes much political will and prowess for such a move, which [Mr Leung] . . . will take time to build up,' wrote Irene Cheung, Asia sovereign and foreign-exchange strategist. Mr Leung has roiled financial markets with his remark that the 18-year-old peg was an 'obstacle' to the efficiency of the economy. A managed float would involve freeing the currency from its fixed rate of HK$7.8 to the US dollar and allowing markets to determine its level. If officials felt the level was too high or low they could intervene in the markets and 'manage' the currency. The remarks by Mr Leung hinting at changes caused the Hong Kong dollar's forward rate to increase last week. Mr Leung, Chief Executive Tung Chee-hwa and Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong subsequently issued denials they were planning any changes. Ms Cheung ruled out 'dollarisation' for Hong Kong which would mean taking the local dollar out of circulation and replacing it with the US dollar. This would be a political non-starter. Pegging the dollar to the yuan, which trades in a tight band between 8.277 and 8.28 to the US dollar, was also unlikely. 'This would imply an effective 5.8 per cent devaluation for the Hong Kong dollar,' Ms Cheung said. 'While this would help, it would not fully restore the competitiveness of the Hong Kong currency given that most Asian currencies have lost 20 to 30 per cent over the past four years.'
