Yuan rise puts heat on Hong Kong dollar peg

With the rising use of the yuan in trade and investment, debate about the Hong Kong dollar's 30-year-old peg to the US dollar is intensifying.

The debate was further fuelled earlier this month when the Bank for International Settlements said that dealing in the mainland currency had reached the equivalent of US$118 billion a day, accounting for 2.2 per cent of the global foreign-exchange market and exceeding the Hong Kong dollar's 1.4 per cent share. That came just three years after Beijing relaxed rules and allowed the yuan to trade in Hong Kong.

Might Hong Kong choose to peg its dollar to the yuan one day? Economists say that's not impossible, but only when the US dollar loses its status as the unrivalled international reserve currency to the yuan - which would take many, many years to achieve.

"The Hong Kong dollar should not be pegged to the renminbi as long as the renminbi is not fully convertible - for example, until China has abolished all capital controls, external and domestic," said Invesco chief economist John Greenwood, known as the "father of the Hong Kong-US dollar peg".

"In my view this will take many years to achieve because one of the essential preconditions for external convertibility is full domestic capital market liberalisation, which itself will take many years to achieve. Don't underestimate how long this would take."

The Hong Kong dollar has been pegged to the US dollar since October 1983, after a monetary crisis triggered a 15 per cent slump in the local currency in one and a half working days. It has been fixed ever since at a rate of around 7.8 to the US dollar. The peg served the special administrative region well during the Asian financial crisis in the late 90s, the severe acute respiratory syndrome outbreak in 2003 and the collapse of investment bank Lehman Brothers in 2008.

However, a number of big names have called in recent years for the peg to be reviewed and consideration given to linking the currency to the yuan instead. They have included the former head of the Hong Kong Monetary Authority, Joseph Yam Chi-kwong, and, most recently, HSBC's Asia-Pacific chief executive Peter Wong Tung-shun.