End of the Road for the Hong Kong Dollar Peg?

by Erik Lueth, Royal Bank of Scotland, 13 June 2012

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Budgeting and Planning cash and liquidity management Corporate finance treasury management

Joseph Yam, the former head of the Hong Kong Monetary Authority (HKMA), suggested the city should review its currency peg to the USD. Mr. Yam’s views were immediately rebuked by the current administration.

I also don’t believe that the peg will be abandoned over the next 7-10 years. Markets took a similar view. Option prices are unchanged from previous weeks.

Rethinking the Peg

In a published paper titled “The Future of the Monetary System of Hong Kong,” Mr. Yam suggested the city should review its currency peg to the US dollar. The comments are significant given Mr. Yam’s former role and the fact that he helped create and defend the peg for the better part of his professional life.

Mr. Yam’s views were immediately rebuked by the current administration. HKMA Chief Executive Norman Chan and Financial Secretary John Tsang issued a joint statement which reiterated that the government is fully committed to the dollar peg and has no intention to change it.

Hong Kong Chief Executive-elect, Leung Chun-ying, also said there are no plans to change the peg.

To say it upfront, I also don’t believe that the peg will be abandoned over the next seven to ten years.

False Alignment

To begin with, one of the central tenets of those who question the peg is not true, namely that Hong Kong’s economy is more closely aligned with the Chinese business cycle than with the US cycle. Yes, mainland Chinese come in droves to shop, including for property, but Hong Kong is also a global financial and transhipment centre.

As a result, Hong Kong’s GDP growth is much more correlated with the global and US business cycle, than it is with the mainland cycle, as shown in Figure 1 below.

Click image to enlarge

This is one of the most

Submitted by marcuss on 19 September 2012 - 5:35am

This is one of the most memorable articles I've ever read. Many websites have pages and pages of text without information, but this article just tells you everything in several sentences. Good job.

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