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SCMP Reporter

Hong Kong should stick with its controversial currency peg until China is ready to float its currency, which might be 10 years away, according to a leading economist.

China needed to develop its fledgling bond markets before it could consider letting the level of the yuan be set by market forces, said Gail Fosler, chief economist for the Conference Board.

'[Hong Kong's] pegged currency is a necessary evil until a broader strategy with respect to the [yuan] is determined,' she said, adding: 'I don't think you can have that until you have deep efficient functioning [mainland] credit markets.'

These markets were 'not even close' to being ready for yuan convertibility, she said.

Institutions to manage consumer savings needed to be developed along with an objective ratings agency and accounting standards.

Without functioning credit markets, Beijing risked chaos if it floated the yuan, Ms Fosler said.

'It would be incredibly globally destabilising to have a currency crisis in the [yuan],' she said. 'To have an emerging markets-sized crisis engulf China, I think this would be a horrific outcome.'

Small open economies such as Hong Kong took 'undue currency risks' with a floating unit, she said.

'Having a currency board or peg is probably preferable as long as society is willing to tolerate the adjustments that are required periodically.'

There have been rumblings of discontent from some businessmen and consumers who have watched property prices tumble 60 per cent from their peak in 1997 as the discipline of the peg went to work.

The peg means Hong Kong has to take economic pain through asset and consumer prices and wages rather than through a weaker currency.

Developers have been adding to problems in the sector by going ahead with new projects, according to Ms Fosler.

'As I come in from the airport I see all these apartment blocks that are going up,' she said. 'But if property values are going down, how can this be the case?

'It seems to me that Hong Kong is still operating from a market perspective as if it [were] in the mid-1990s.'

With the plunge in property prices, up to 200,000 households are in negative equity - a powder-keg that threatens economic stability and the peg.

However, the Government had the power to further restrict land sales and if necessary buy up tranches of mortgages which were under water, securitise and sell them, she said.

Hong Kong's problems were not related just to a cyclical downturn but were to do with its economic structure.

'As far as the Hong Kong economy is concerned the formula for the future is still elusive,' she said. 'Hong Kong has really not become a major high-technology centre. It is certainly not the retail centre it was five years ago.'

The 'workman-like' SAR was overly reliant on its commercial sector and needed to develop its cultural activities to renew its appeal, Ms Fosler said.



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China’s offshore yuan breaks major benchmark as appreciation momentum builds

Foreign exchange market

Peg seen anchored until eventual yuan float a decade away