Hong Kong SAR's Monetary and Exchange Rate Challenges

Hong Kong SAR's Monetary and Exchange Rate Challenges

edited by Catherine R. Schrenk

Palgrave Macmillan, HK$670

We live in interesting times. Those interesting times have forced us to look at things we normally ignore: derivatives, durable goods sales, even currency levels as the carry trade declines across the world, putting some Asian currencies under pressure.

So far currency boards have not been in the spotlight - probably because the current crisis has yet to push Asian currencies to the brink of collapse. Hong Kong is weathering the storm better than most. And while the efficient functioning of a currency board such as Hong Kong's is probably less interesting than a wet weekend in Wales, that board is worth a second look. As Warren Buffett observed: 'It's only when the tide goes out that you realise who's been swimming naked.'

It was only the onset of the Asian currency crisis that revealed Hong Kong was almost the only economy that had invested in Speedos.

Other economies were over-exposed. The reason? In their feverish pursuit of foreign investment, they had allowed businesses to fund long-term local currency projects with short-term foreign currency loans.

The investments worked only if the currencies didn't move too much relative to the US dollar and the projects paid off as planned when completed. Unfortunately, sovereign downgrades of Thailand in 1997 sent shockwaves through debt markets, alarming the big institutions funding the Asian miracle. The result was the Asian currency crisis, when creditors and foreign investors voted with their wallets, demolishing everything from the rupiah to the won in the process. Major credit-rating agencies slashed ratings across Asia, leaving their currencies swooning.

The SAR also felt the impact of the crisis, but its currency regime stood it in good stead. Assets such as equities and property investments took a battering but the Hong Kong dollar was rock solid. This book explains how the peg works and why it was established. Its contributors include John Greenwood, the chief economist at Invesco and the man credited as the instigator of Hong Kong's currency board system.

The peg mechanism was established in October 1983 to head off a confidence crisis. China and Britain were hammering out the terms of the territory's future and uncertainty was high, with some workers even demanding payment in US dollars.

The peg was the answer.

Joseph Yam Chi-kwong, Hong Kong Monetary Authority chief executive, is a contributor to this book. Anyone hoping to understand what makes Hong Kong unique as a banking centre should take it as their starting point.