It is an axiom of the labour market that minimum wages only ever go up, never down. If the saying holds true when Hong Kong introduces its own minimum wage next May, it could prove painful for the city's economy. Certainly, the evidence from other countries appears to support the view that minimum wages only rise. Consider the example of Britain, which introduced is first national minimum wage in 1999. At the time, the adult minimum was set at GBP3.60 an hour. Over the following years, it rose steadily, and last month it went up again, to GBP5.93 (HK$73.45) an hour - an increase since its introduction of 65 per cent. Of course, living costs went up in the meantime, which meant the minimum wage had to rise if it were to keep its purchasing power. But during the so-called 'great moderation' of the past decade, even Britain enjoyed relatively low rates of inflation. Between April 1999 and the beginning of last month, consumer prices climbed by just 25 per cent. That means in real inflation-adjusted terms, Britain's minimum wage has gone up 32 per cent since it was brought in (see the chart below). Similarly, in the United States, the federal minimum wage has climbed from 74 US cents an hour in 1950 to US$7.25 today, which equates to a doubling in real, inflation-adjusted terms. Social engineering enthusiasts will no doubt say this is a thoroughly good thing; a fine example of minimum wage legislation doing exactly what it is meant to do and improving the real incomes of the poorest-paid members of the workforce. But if the same one-way trend applies in Hong Kong, when the new minimum wage comes in next year it could threaten unexpected problems for the city's workforce. When other economies lose their competitive edge, they typically restore it through a depreciation of their currencies. That's what much of Asia did in 1997. The process was painful, but relatively short-lived. But because of our currency peg Hong Kong was unable to devalue. Restoring the city's competitiveness took much longer, and the adjustment took place largely through a steep fall in property prices coupled with a decline in wages, especially among the less well paid. According to figures from CEIC Data, between 1998 and 2004 median earnings in the retail sector slumped from HK$9,500 a month to HK$7,000, a fall of 20 per cent. Today with property prices shooting higher and inflation picking up, there is a growing danger that Hong Kong's international competitiveness may get eroded all over again. This time around however, some analysts fear that when the inevitable readjustment eventually comes, because of the minimum wage law it will not be able to work itself out through a fall in wages. And if it the necessary adjustment can't occur through a drop in wages, then it will have to involve a sharp increase in unemployment, which will be even more painful. 'It is very important that the minimum wage be able to move in both directions, both up and down in nominal terms, as economic conditions change,' warned Nigel Chalk, senior adviser at the International Monetary Fund, following his annual consultation with the Hong Kong government last week. But politics dictate that minimum wages never fall, which means that Hong Kong's next deflationary adjustment is likely to involve a steep rise in unemployment. Professor David Li Daokui, a Tsinghua University economist and an adviser to the People's Bank of China, suggests Beijing should revenge itself on Washington for debasing the US dollar by offloading its holdings of US Treasuries to the US Federal Reserve. It sounds like a neat idea. The Fed is buying US$600 billion of Treasury debt as it embarks on its latest programme of quantitative easing. So why shouldn't China sell? Alas, there is a problem with Li's plan. If China were to sell, then it would have to find something to do with all the US dollars it received in return. It could invest them in US dollar assets, but few are as liquid or as low-risk as Treasuries. On the other hand, it could try to sell its US dollars for other currencies like the euro. But that would put enormous downward pressure on the US dollar in the foreign exchange market. And enormous downward pressure on the US dollar would mean enormous upward pressure on the yuan. That would leave the central bank with two options. It could step up its interventions to maintain the yuan's stability against the US dollar. But inevitably that would mean buying large quantities of US dollars, which it would then have to park somewhere - most likely in the very US Treasury debt it would be trying to offload. The other option would be for the central bank to step back from the market and to allow the yuan to rise against the US dollar. But that, of course is exactly what Washington wants Beijing to do. As a result, Li's threat is meaningless. Beijing can either go on buying US dollars and funding both the US current account deficit and Washington's budget deficit, or it can stop buying US dollars and let the yuan appreciate. Some revenge - either way Beijing would be doing Washington a favour.