Hong Kong’s e-dollar study in spotlight as city’s US dollar peg remains strong
- Hong Kong Monetary Authority has set up a working group to look into ‘legal and regulatory issues’ related to an e-Hong Kong dollar
- Local currency’s peg to US dollar is regularly questioned amid concerns that the de facto central bank might be forced to abandon the currency board
As the Hong Kong dollar continues to remain strong, attention is turning towards the potential for a digital version to be launched in the city.
“The HKMA is studying the aspects relating to the risks in legal and regulatory issues.”
A BIS survey earlier this year found that 86 per cent of 65 central banks were researching the potential for central bank digital currencies, with one-fifth of the world’s population likely to see a sovereign digital currency in the next three years.
For decades, the HKMA has run an interest rate policy in lockstep with the US Federal Reserve to maintain the currency peg to the US dollar.
The HKMA is obliged to intervene in foreign currency markets to buy or sell US dollars and to keep the Hong Kong dollar trading within a narrow band of 7.750 and 7.850 against the American currency.
A rise in the US dollar-Hong Kong dollar exchange rate means that the local currency has weakened, since it takes more Hong Kong dollars to buy one US dollar, and vice versa.
With the currency board weathering many economic cycles and crises, the likelihood of the peg collapsing is considered very low for now.
But the HKMA could decide to switch the yuan in the long term, particularly if the e-yuan helps mainland China open up its financial system, and as the mainland’s high economic growth is sustained, according to analysts.
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Why Hong Kong pegs its currency to the US dollar
In the past year, the Hong Kong dollar has been trading on the strong side of the band, despite the pandemic-induced economic recession. On Wednesday, the local currency was changing hands at around 7.76 per dollar.
“China’s economy will double the size of the US, and when that happens, we can certainly expect the yuan to be much more used globally,” said David Chao, global market strategist for Asia-Pacific at Invesco.
“One day, as the Hong Kong economy becomes even more intricately linked to China’s economy, there could be further discussion on how the yuan could be potentially linked to the Hong Kong dollar.”
EFG Bank said in a recent report that the current 10-year Hong Kong dollar yield showed investors’ willingness to lend at a relatively depressed interest rate because of their belief that the peg could be broken, potentially leading to a strengthening of the Hong Kong dollar.
“An appreciation of the Hong Kong dollar is compatible with the peg being switched from the US dollar to the yuan, and the latter appreciating against the US dollar,” EFG’s report said.
“From a historical and political perspective, it remains a possibility in the more distant future.”
BIS’ Tiwari said that while it was important for central bank digital currencies to be used domestically, in line with central bank domestic mandates, improving cross-border payments was also a major priority for the global community, and that sovereign digital currencies could play a key role in enhancing the efficiency of international payments.
Li said the role of Hong Kong’s commercial banks will be unaffected, if taking mainland China’s two-tier system as a reference. The e-yuan is backed by the People’s Bank of China and is disseminated to people via commercial banks.
Similarly, Bank of China Hong Kong, HSBC and Standard Chartered Bank “are not only responsible for issuing physical banknotes but are also the key players in the money market, and the main counterparty of the HKMA when it intervenes directly in the spot market to defend the currency peg”, Li said.
