Protecting peg proves a wordy endeavour
One of the great journalistic mysteries in Hong Kong has to do with the Monetary Authority.
For as long as I can remember, whenever the Hong Kong dollar comes under pressure and the HKMA intervenes – either buying or selling as the case may be – to nudge the currency back to the preset trading range with the US dollar, newspapers inevitably call it “defending the peg”. A defence? How about “support”? It’s less dramatic but more accurate.
That sort of headline is back in the news as the local currency is falling against the US dollar like most other major currencies around the world. But that is no real defence. No courage or sacrifice on the part of finance officials or great judgment or financial acumen is required. It’s just a natural function of our currency board. It’s almost automatic – a no-brainer.
The Hong Kong dollar is pegged to the US dollar at HK$7.80, and the HKMA will intervene whenever the currency trades above the strong end of HK$7.75 or weak end at HK$7.85. The trading band is in fact there to make it harder for currency raiders to milk the peg.
Okay, we intervene at the strong end more often than at the weak end, which we haven’t done in 10 years. The HKMA spent HK$227.15 billion last year from its fabled HK$3.27 trillion Exchange Fund to weaken our currency. Now it is likely to intervene to prevent it from becoming too weak.
The automatic adjustment is in fact the beauty of a currency board. Can you imagine our finance officials given free rein to set interest rates? That would require a deep understanding of monetary policy.
One of the great unstated benefits of the peg is that it’s designed to be almost automatic – perfect for finance officials with average intelligence, no imagination and mediocre intellect. So all this “defence” talk sounds like aggrandising a job that requires minimal expertise.
But such talk also has another, more pernicious, purpose. A defence needs a weapon, and the weapon, in this case, is the Exchange Fund. How “powerful” does this fund need to be? In 2014, HKMA chief Norman Chan Tak-lam said he needed every cent of it to “defend” the peg. When it grows to HK$4 or $5 trillion, I am sure Chan or his successor will say the same. In other words, though it’s our money, there is no way in hell you and I will ever see a cent of it.