Peg shift would mean pay cuts, deflation: Chan

Pay cuts and deflation would sweep across Hong Kong if the peg to the US dollar was abandoned and switched to the yuan, Hong Kong Monetary Authority chief executive Norman Chan Tak-lam said.

"If the Hong Kong dollar were pegged to the [yuan], Hong Kong's exports and the overall competitiveness of the economy would substantially weaken," Chan wrote in an article in the South China Morning Post today analysing the peg's 30 years of operation. "We would have to go through the pain of pay cuts and deflation before our competitiveness could be restored."

The frank assessment of the competitiveness risks posed to Hong Kong by a potential end to the peg offers a rare glimpse into the analysis the city's monetary authorities have conducted into the economic impact of a change in the value of the currency.

HKMA officials say it is the first time such a detailed analysis of the competitive risks involved in a change to the linked exchange rate system has been publicly disclosed.

The authority estimates that Hong Kong's labour productivity has grown at an average annual rate of 3 to 4 per cent over the past 10 years, while the mainland has achieved a rate close to 10 per cent. And it expects the mainland to deliver relatively high rates of productivity growth for a prolonged period of time.

The loss of competitiveness by a shift in the peg would effectively plunge Hong Kong businesses back into the misery they experienced during the depths of the 1997-98 Asian financial crisis.