IT IS hardly surprising that on the 10th birthday of the Hong Kong dollar peg, the currency link should again be at the centre of debate. Since it was announced on October 15, 1983, the $7.80 fixed link to the US dollar has been nothing if not controversial.
This time it was HSBC Holdings chairman Sir William Purves who rekindled the argument. In answering questions after a speech at the Foreign Correspondents' Club he commented that the peg arrangement was not set in cement and could eventually be altered when the time was right.
He was talking theoretically but he shouldn't be surprised that his remarks caused a stir. The financial markets have always looked for signs that the Government's commitment to the peg was less than 100 per cent.
Although the peg has only seriously been tested twice over the past 10 years, time and again questions have been asked about its effectiveness. Long academic treatises have been written both for and against the fixed link but the debate boils down to twopoints. Will the peg be changed? If so, what will replace it? The fact that the questions are asked together is evidence that some kind of currency link is needed. In the dangerous waters of the 1997 handover, few people envisage a Hong Kong currency that could freely float.
The biggest argument against the peg is that it's a source of inflation. Certainly in recent years the inflation rate, particularly in the service sector, has been uncomfortably high.
However, the extent to which the peg is responsible has not been proven. A bigger culprit is the labour shortage and to solve that it is necessary to increase labour importation not tamper with the peg.
To realise the value of the peg it is necessary to look back to the dark days of its inception. Faltering Sino-British talks and deep trouble in the financial markets conspired to create a run on the currency.
