The first rule of running a fixed exchange rate system is that it is fixed come high hell or high water. To suggest otherwise indicates doubt about one's commitment and invites speculation of change. Honesty and transparency are virtues we demand of public servants, but in the case of finance officials a secretive parsimony is a necessary vice. Hence, it is distressing to see Financial Secretary Antony Leung Kam-chung musing on possible threats to Hong Kong's 20-year peg to the US dollar. It goes without saying that we face economic stress as a result of the Sars crisis. Hard economic numbers are not in for last month, but a dramatic reduction in consumption spending is likely to be reported. A bigger budget deficit is inevitable. The crisis also produced tension in currency markets, with last month's weakening of Hong Kong dollar currency forward rates indicating some investors saw an increased chance of a devaluation. Still, a stabilisation of the public health situation and a cautious return to normality has meant that rates have eased. In Hong Kong's favour has been a sharp lowering in the international value of the US dollar. Hong Kong may not have been dealt many good cards of late, but the impact of a cheaper dollar has been to offset deflationary trends and make local firms marginally more competitive with foreign rivals. What is more, the major international credit-rating agencies have affirmed their sanguine view of Hong Kong's prospects and creditworthiness. All this means it is baffling to again see Mr Leung pondering 'what if' questions about the durability of the currency system. His view that the link is an impediment to long-term recovery is well known, but as the minister charged with ensuring financial stability he should keep his opinions private. There is little firm evidence suggesting that the economic fallout from Sars will adversely affect the currency system. Since the East Asian financial crisis five years ago, businesses have paid down debt, the trading economy is robust, fiscal and foreign currency reserves remain plentiful and, most importantly, banks are well capitalised. This is not to invite complacency. Should the fiscal deficit - running this year at an estimated $75 billion - go unchecked, then Hong Kong could yet see an erosion of international confidence. However, that is a long-term problem that should not be confused with a shock impact from the Sars crisis. If Mr Leung is seeking to steer the agenda towards talk of de-pegging, he is inviting grave danger. When it comes to maintaining fixed currencies, fear breeds fear, and to suggest anything but utter and complete official commitment to the system is to invite a collapse in confidence. It is worth briefly reminding ourselves why there is no easy alternative to the present system. Hong Kong is an international financial centre that depends on a stable and freely tradable currency unit. Until the mainland opts for a fully convertible currency, the logical alternative of linking ourselves to the yuan is not viable. A rules-based currency system stops expedient measures to boost unsustainable short-term growth. Having a floating currency would require a credible and independent central bank, something that is hard to imagine given the state of Hong Kong's political evolution. Devaluing would cause immediate inflation as the value of imported goods rose. As Hong Kong is almost entirely reliant on imported food and consumer products, the poor would be worst affected. Firms would be worse off since it is unlikely they would be able to raise prices to match the higher costs of their imports. For now there is no alternative to the peg, something Mr Leung would do well to recognise.
