Articles
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How many more birthdays for Hong Kong dollar peg?
By Craig Stephen
HONG KONG (MarketWatch) — Hong Kong’s currency peg to the U.S. dollar celebrated its 30th birthday last week. But how many more anniversaries will it have? Local officials say it will be around for many years to come, but two key developments suggest change is a question of when not if.Firstly, there is China’s accelerating push to internationalize the yuan. Well before this month’s launch of the Shanghai Free Trade Zone, efforts to increase the yuan’s global circulation are bearing fruit.
Last month, the Bank of International Settlements announced trading in yuan had surpassed that of Hong Kong dollar for the first time. If China continues on this path to make the yuan a convertible currency, it removes the key justification for Hong Kong not having some form of peg to the money used on the Chinese mainland, which is the territory’s largest source of trade.
The other, often overlooked factor is looming political change in Hong Kong. With a timetable set for a democratically elected chief executive in 2017, the next government will need to get used to demonstrating the merits of policies to the wider public. And it will need to justify retaining a colonial-era currency peg.
Exchange rates are highly political, and when officials need to be re-elected, continuing to outsource monetary policy to the U.S. Federal Reserve looks to be a hard sell. The budget stand-off in Congress and the ongoing uncertainty over Fed tapering have been the latest reminders of the risks of tying your fortunes to the U.S.
So far, however, the turmoil in Washington doesn’t appear to be causing any pause for thought — or any new thoughts at all by Hong Kong officials.
Last week, both Hong Kong Monetary Authority (HKMA) chief Norman Chan and Financial Secretary John Tsang, were in local newspapers extolling the virtues of the peg as a bedrock of financial stability and reiterating they see no reason to change. Their hymn sheet might not have changed, but increasingly the merits of the peg are being questioned.
For one, the pressures from importing ultra-loose U.S. monetary policy continue to exacerbate key problems of unaffordable property prices and escalating income inequality.
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