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Shooting down some common misconceptions about the HK$

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A lot of nonsense has been talked in the past few weeks about the future of the Hong Kong dollar peg.

People who should known better have looked at the steep rise in Hong Kong property prices and argued that our exchange rate peg to the US dollar is inflating a dangerous asset price bubble.

And people who are otherwise quite sensible have noted the rapid growth of yuan deposits in Hong Kong, and concluded that the city should bow to the inevitable and abandon its long-standing currency link to the US dollar in favour of a peg to the yuan.

These ideas have become so widespread that even HSBC, an ardent promoter of yuan business in Hong Kong, has felt compelled to pour cold water on the speculation. In a research note sent to clients on Friday, Richard Yetsenga and Dominic Bunning, the bank's Hong Kong-based foreign exchange strategists, debunk some of the more common misconceptions about the peg and its future viability.

First, they rebut the often-repeated charge that since the 2008 financial crisis Hong Kong has decoupled from the US economic cycle and that as a result a peg to the US dollar is no longer appropriate. In fact, as the first chart below makes clear, the divergence between the two economies has been much greater in the past, for example during the Asian crisis of the late 1990s. At the moment, with both economies in recovery mode, by historical standards they are tightly in phase.

Next, Yetsenga and Bunning take aim at the idea that the recent rise in consumer and asset prices in Hong Kong is anything out of the ordinary.

At 2.6 per cent, consumer inflation is running below its 20-year average of 3.1 per cent and is a far cry from levels as high as 12.5 per cent experienced in the early 1990s.

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