ExclusiveHong Kong should stick to four-decade-old US dollar currency peg as it braces for ‘unusual challenges’ ahead, HKMA former CEO Yam says

Keeping a system that has proven to be most resilient is our best option, city’s longest-serving central banker says
Linking local currency to the yuan should only be considered ‘if there is a nuclear war in finance’

Hong Kong at 25

Enoch Yiu

Published: 8:00am, 6 Jun, 2022

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Hong Kong should stick to its almost four-decade-old currency peg with the US dollar, as it is the best option for the city in the challenging times ahead, says the peg’s founder and the city’s longest-serving central banker.

Joseph Yam Chi-kwong, the first CEO of Hong Kong’s de facto central bank, the Hong Kong Monetary Authority (HKMA), from its establishment in 1993 until 2009, set the currency peg fixing the Hong Kong dollar at 7.8 per US dollar in 1983. It has been allowed to trade between 7.75 and 7.85 per US dollar since 2005, with the HKMA intervening in the market if it trades beyond this band.

Currently, a member of outgoing leader Carrie Lam Cheng Yuet-ngor’s cabinet, Yam rejected calls for change, including pegging the Hong Kong dollar to the yuan.

“It looks like Hong Kong is going into a period that will present unusual challenges to the stability and integrity of our monetary and financial systems, and to our status as an international financial centre,” Yam said in an interview with the South China Morning Post.

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“The [current] system continues to be most suitable for Hong Kong, as we brace ourselves for meeting the possible challenges ahead. Keeping a system that has proven to be most resilient is our best option,” he said.

There have been calls for a review of the peg recently, because of interest rate increases in the United States since March, with the next one due on June 16. The US Federal Reserve has signalled 10 increments in US interest rates until the end of next year, which Hong Kong will need to follow because of the currency peg, even though it is facing economic downturn and high unemployment.

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The challenges Hong Kong faces include, along with the ongoing coronavirus pandemic: inflation across the globe; withdrawal of stimulus measures in the US and the West; and geopolitical tensions between China and the US, with America showing a tendency to weaponise finance. There is a fear that Washington might introduce sanctions and ban Hong Kong from accessing the US dollar to break the peg.

Yam said he did not believe this would happen. “I just cannot see why the US would want to impose on Hong Kong the type of financial sanctions now being applied to Russia. These are nuclear options,” he added.

The US would not want to “destroy or damage” Hong Kong, which is one of the most active US dollar trading centres in the world and a gateway between the US and China, he said. “Imagine also the repercussions such a nuclear option might have on sentiment in global financial markets, and on the status of the US dollar,” he added.

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As far as linking the local currency to the yuan was concerned, Yam said this “should only be considered as one of many contingency options, if there is a nuclear war in finance”. Switching the peg to the Chinese currency will require handling a lot of technical issues and “this will not happen any time soon”.

“If we are forced to change the currency anchor link from the US dollar to another currency, it means the Exchange Fund will need to switch about US$300 billion worth of liquid US dollar assets [that are currently] giving full backing to the Hong Kong dollar monetary base into assets in the new anchor currency. Let me tell you – this is not a simple matter,” Yam said.

The city could, however, do more to help internationalise the yuan further, he said, as China would like to reduce its dependence on the US dollar in its international economic and financial activity.

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“The offshore yuan market in Hong Kong has an increasingly important role to play in the years ahead,” Yam said, adding that the yuan could be used along with the Hong Kong dollar for stock market pricing and settlement, which would be a “wise and strategic move”.

On the subject of whether the Hong Kong dollar would continue to exist as a stand-alone currency in 2047, 50 years after Hong Kong’s handover to China, Yam said: “Why not?”

President Xi Jinping said in 2018 that the world was undergoing a change not seen in a century, with the rise of China and the West developing strategies to contain it. Such a change will present new challenges and opportunities for Hong Kong, Yam said.

“To continue to play an essential role as the preferred intermediary, particularly when global financial markets are poised for directional shifts and volatility, I see no better alternative than to keep the peg in place,” he said.