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TWO CENTS' WORTH
Hong Kong pegged
to a failed policy
By Henry C K Liu
Since its establishment as a Special
Administrative Region (SAR) of China on July 1, 1997,
which coincided with the Asian financial crisis that
broke out in Thailand a day later, Hong Kong has
operated on a one-note monetary policy: that of
defending its currency peg, officially known as the
linked-exchange-rate mechanism. With the peg in place,
all new policy initiatives to restructure the sinking
economy are constrained to the point of paralysis.
Back in 1944, the US Treasury stated in the
"Questions and Answers" submitted to the Bretton Woods
Conference on the proposal to establish the
International Monetary Fund (IMF) in support of a
postwar global financial architecture: "It would be a
complete inversion of objectives if a high level of
business activity were to be sacrificed to maintain any
given structure of exchange rates."
There is no
denying that the linked-exchange-rate mechanism that
pegs the Hong Kong dollar at a fixed rate of 7.8 to one
US dollar within a narrow range has produced a complete
inversion of objectives. The peg has trapped the Hong
Kong economy in a downward spiral of deflation and
unemployment for more than five years. There is no
economic rationale or policy purpose in continuing the
peg. It is a purely political decision, and not one of
wisdom, courage or leadership.
Yet a deputy
chief executive of the Hong Kong Monetary Authority
(HKMA) in a June 11 speech in Estonia, the only other
remaining currency board regime after Argentina,
summarized the official position before a gathering of
faithfuls: "We do not regard the exchange rate as a
viable instrument for trying to dispel deflation. We
would not consider it worthwhile sacrificing our long
track record of disciplined monetary stability for that
purpose ... It should be possible to choose a policy
which could succeed in the narrow objective of
eliminating deflation, at whatever cost or benefit in
terms of other policy objectives. But the currency board
regime rules out such a choice, and in this sense it
cannot escape from being ascribed some significance in
the explanation of Hong Kong's price deflation." Thus it
is very clear that the HKMA continues to consider the
peg itself as the overriding policy objective to be
maintained at any cost, even at "a complete inversion of
objectives".
Yet while mouthing resolute
commitment to the peg, Hong Kong has been taking stealth
operations to set interest-rate targets, thus inviting
recurring speculative and manipulative attacks on its
fixed currency, which is not supposed to happen with a
currency board regime. The currency peg has made the
Hong Kong dollar overvalued since the outbreak of the
Asian financial crisis, when every other Asian Tiger
devalued its currency against the US dollar. Hong Kong
interest rates must track high US rates plus a country
risk premium.
An overvalued currency is like an
excessively tight monetary policy. It deflates prices
and holds down the growth of output and employment. The
collapse of property prices in Hong Kong since 1997,
which contributes to half of the fall in the Consumer
Price Index (CPI), albeit largely the result of the
bursting of a previous asset price bubble linked to
excessively loose domestic monetary conditions in the
decade prior to 1997 as a consequence of the currency
board mechanism that had produced an undervalued Hong
Kong dollar, now threatens the entire financial system
of the SAR. Defining the elimination of deflation under
current conditions as a narrow objective is the height
of policy folly.
The exchange rate is an
inherent aspect of monetary policy. No monetary
authority can afford to ignore even minor changes in the
foreign-exchange value of its currency in this
globalized market. Even with floating rates, the
foreign-exchange market needs constant guidance by the
monetary authorities, not only through the usual
instruments of monetary policy, but at times also
directly through market intervention.
The
critical issue centers on what should be the objective
of intervention and how it should be integrated with
other aspects of monetary policy. Intervention is a
bridge action and effective intervention requires a
clear identification of a policy destination, such as
high employment or reflation or at least price
stabilization. If a sustainability configuration of
monetary policy is not in place, intervention will end
up as a bridge that goes nowhere or, worse, in the wrong
direction.
A fixed exchange rate for a freely
convertible currency such as the Hong Kong dollar is in
essence a regime of constant automatic government
intervention in a volatile currency market. The peg in
the current environment of an overvalued US dollar is a
downward-spiraling bridge that leads to increasing
unemployment and continuing deflation, and high real
interest rates, a combination that will lead to economic
meltdown.
As intervention in the exchange market
affects other countries, it should only be undertaken in
cooperation with the countries whose currencies are used
for intervention (in the case of Hong Kong, mostly the
US dollar). The peg makes such cooperation superfluous,
rendering it unnecessary for the US Federal Reserve
(Fed) to consider the impact of its monetary policy on
Hong Kong, because the peg robs Hong Kong of the ability
to take counter-policy measures to neutralize the
adverse effects on its economy from US monetary policy
and measures.
Upward or downward pressure on the
foreign-exchange rate may be a signal that the exchange
market believes that a change in monetary policy is
necessary to sustain a healthy growth economy.
Therefore, when the monetary authorities intervene in
the exchange market, they need to consider whether the
intervention should be augmented by adjustments in their
respective monetary policies.
Yet with the peg,
freedom to adjust monetary policy to respond to changing
market sentiments and conditions is automatically and
voluntarily forfeited. This forces the market to express
its fluctuating concerns in alternative ways, such as
capital flight and asset price deflation, forcing both
output and consumption down and unemployment and
bankruptcies up. While Hong Kong officially professes to
be the mecca of the free market, it irrationally insists
on a fixed exchange rate for its currency in the name of
"stability", thus distorting market forces to the
disadvantage of its economy. It is a boom-and-bust
monetary policy of extreme autistic masochism.
A
fixed exchange rate in this world of dynamic currency
and financial markets amounts to constant automatic and
often mis-targeted interventions to mask policy failures
that extend an unsustainable economic paradigm by
asserting a false stability that comes only at ruinously
high cost. It represents an official commitment against
incremental defensive responses to adverse dynamics
before they escalate into a major crisis. The only
stability a fixed exchange rate brings is the high level
of relentless economic pain that otherwise could be
avoided.
Intervention changes the monetary
situation as it affects the money supply and the
reserves of the banking system. Thus, selling foreign
exchange to support the exchange rate has the same
effect as the Fed selling Treasury bills in order to
tighten the monetary aggregates. Hong Kong has no
deposit reserve requirement for its banks, only a
liquidity requirement (25 percent of assets in specified
liquid forms against total deposit liabilities) and
banks need only to maintain a clearing balance with the
HKMA that can cover their interbank settlements. If a
bank runs out of funds, the HKMA's Hong Kong dollar LAF
(liquidity adjustment facility), which serves in the
role of a lender of last resort, is there to smooth over
any liquidity crisis.
Hong Kong has to maintain a
foreign-exchange reserve currently in excess of US$111
billion (80 percent in bonds and 20 percent in equities
of which 5 percent are Hong Kong equities; 80 percent in
US dollar block currencies, 15 percent in euro block and
5 percent in yen) merely to support the overvalued peg
that has been the key cause in slowing the economy and
accelerating deflation and unemployment. The
foreign-reserve assets fell in market value by close to
US$1 billion in the month of August last and the
Exchange Fund dropped by US$1.32 from end-June to
US$123.79 billion at end-July, whereas a full employment
program would cost less than US$275 million a month
under the worst scenario (See On
offer: A full employment program for Hong Kong
March 30,
2002). The total foreign currency reserve assets of
US$111.2 billion represent more than seven times the
currency in circulation or about 44 percent of Hong Kong
dollar M3 (an all-inclusive measure of money supply as
defined by the Fed), one of the highest ratios in the
world.
Notwithstanding the curious
interpretation of this fact by the HKMA as a sign of
monetary strength, it is actually a sign of monetary
weakness that such a large reserve is necessary to back
up an overvalued exchange rate. An overvalued currency
should not be mistaken for a strong currency. A strong
currency with an operative exchange rate for an economy
with a trade surplus theoretically would require no
foreign-currency reserve. By definition, only a weak
currency would require foreign-reserves backing. The
larger the gap between market sentiment and a fixed
exchange rate, the larger a foreign reserve is required
to sustain the fixed rate.
The high
over-reserved situation is as ridiculous as the
preposterously high salary of the chief executive of the
HKMA, Hong Kong's pretend central banker, which amounts
to almost 10 times that of the chairman of the Fed, the
real central banker in whose hands real policy
prerogatives of central banking for Hong Kong lie, and
who also faces an income-tax rate twice that of his Hong
Kong counterpart. It is a classic case of compensation
being inversely proportional to responsibility.
Abandoning the peg would free up Hong Kong's
foreign-reserve assets for use in domestic
counter-cyclical programs to support full employment to
stimulate the economy, which would also benefit from
being freed from the punitive burden of the peg.
When monetary authorities intervene in the
exchange market, consideration must be given to whether
the magnitude of the consequent monetary changes is
consistent with the broader objectives of economic
policy. The peg ignores any such rational consideration
of broader objectives.
The amount of
intervention is not a proper measure of the change in
the monetary aggregates that is appropriate for the
economy. If the intervention causes too large a change
in the money supply and bank reserves or liquidity, the
monetary authorities may have to undertake open market
operations to offset the excess. The peg prevents the
HKMA from doing that. The behavior of the exchange rate
is only one, and not the most important, indication that
a change in monetary policy is necessary. Deflation and
unemployment are by far more important indications.
The official line is that the peg has served the
Hong Kong economy well since its adoption in 1983. This
assertion is at variance with facts.
The peg was
launched with an official devaluation from a floating
market rate of 4.6 to one US dollar to 7.8 to defuse
market panic after the 1983 Joint Declaration to return
Hong Kong to China 14 years later, which pushed the
free-floating exchange rate temporarily to 9.6 on
September 24, 1983. The Plaza Accord in 1985, two years
after the adoption of the peg, pushed the US dollar down
against the yen, and produced an undervalued Hong Kong
dollar that in turn gave birth to a bubble economy that
burst 12 years later, in 1997, as part of the Asian
financial crisis.
The way the peg served the
Hong Kong economy well in this period was to generate a
bubble economy that Nobel economist Milton Friedman
mistook for a fantasy-free market miracle. The
asset-price bubble, for which the peg was the main
culprit, was concentrated in the property sector. Share
prices in the manufacturing, logistics and service
sectors had relatively reasonable price-earning ratios
even at the bubble's peak, based on hefty export
earnings generated by an undervalued currency.
Since 1997, an overvalued Hong Kong dollar has
caused property prices to fall by as much as 60 percent,
dragging down the Hong Kong equity market, which has
always been heavily weighted toward the property sector.
It was estimated that plunging property prices had
caused 57 percent of the 13 percent overall annual
deflation in the economy over the past four years.
When the Hong Kong dollar was undervalued, banks
charged negative interest for Hong Kong dollar deposits.
When the Hong Kong dollar is overvalued as it is now, in
order to attract Hong Kong dollar deposits, banks in the
SAR are forced to offer substantial interest-rate
premiums for Hong Kong dollars versus US dollars,
pushing bank lending rates up.
Hong Kong
residents generally, like other rational market
participants, are unwilling to hold a substantial
portion of their cash or other liquid assets in Hong
Kong dollars as long as uncertainty regarding the
sustainability of the peg remains. Selling pressure on
the Hong Kong dollar will likely continue to come from
Hong Kong citizens and businesses, as well as global
market participants, defensively converting their Hong
Kong currency to US dollars, maintaining upward pressure
on Hong Kong dollar interest rates and consequently
downward pressure on the stock and property markets.
This is the platform on which speculative and
manipulative attacks on the Hong Kong dollar can do
their ugly dances.
Ability to defend a peg is
not identical to willingness to defend a peg. No doubt
Hong Kong has the financial ability to defend the peg,
yet the market's suspicion that Hong Kong might not be
willing to defend the peg at all costs continues to fuel
attacks on the Hong Kong dollar. Hong Kong professes an
official attachment to a fixed currency mechanism, but
it repeatedly exhibits an unwillingness to bear its real
costs. The market will not let Hong Kong have its cake
and eat it too.
Hong Kong has been shifting
between a rule-based currency board and a discretionary
currency board throughout its monetary history. From
1935 to 1967, Hong Kong operated a classic colonial
currency board pegged to the pound sterling, except that
private banks, not the government, issued the currency,
a practice that continues today. Instability in the
value of the pound in the late 1960s pushed Hong Kong to
switch to a US dollar peg. The US dollar too came under
attack in the early 1970s, resulting in the dollar
sinking in free float. Hong Kong decided also to let its
currency float, which worked reasonably well until the
commencement of Sino-British negotiations on the return
of Hong Kong to China, which unleashed wild speculation
against the Hong Kong dollar. By the end of October
1983, Hong Kong ended its brief experiment with floating
exchange rates and announced that it was pegging its
currency to the US dollar at a conversion rate of
7.8:1.0.
In July 1988, an Accounting Arrangement
became a law that required the two note-issuing banks,
Hong Kong Shanghai Banking Corp (HSBC) and Standard
Chartered Bank, to open clearing accounts with the
Exchange Fund, the balance in which would represent the
net liquidity of the banking system. After 1997, the
Bank of China (Hong Kong) was added as the third
note-issuing bank. Thus the Exchange Fund gained
complete discretion over the level of this clearing
balance.
In June 1992, the liquidity adjustment
facility (LAF) was established, shifting the peg closer
to a discretionary mechanism. The LAF acts like the
discount window of the Fed, allowing banks to make late
adjustments to their clearing accounts through
repurchase agreements (repos) with the Exchange Fund.
The bid and offer rates at the LAF established floor and
ceiling rates in the interbank overnight funds market,
similar to the Fed Funds rate target set by the Fed.
Another discretionary shift involved the
establishment of a government securities market in the
early 1990s to improve the functioning of Hong Kong's
financial system. The existence of government securities
allowed the Exchange Fund to commence open market
operations, buying and selling government securities, a
more efficient way to manage bank liquidity than direct
currency intervention.
The problem, from a
market credibility standpoint, is that the distinction
between managing liquidity and conducting discretionary
monetary policy is not well defined. This ill-defined
distinction implies great significance because Hong Kong
historically has never had an independent central bank
institution. It still does not. The HKMA is under the
policy supervision of the financial secretary, who
serves at the pleasure of the chief executive of the SAR
government.
In December 1992, in preparation for
Hong Kong's return to China by 1997, the Exchange Fund
Ordinance was amended to set up the HKMA, which took
over operation of the Exchange Fund. The HKMA was
granted bank regulatory powers, and began to develop an
institutional schizophrenia as both the keeper of a
currency board and a central bank. The chief executive
of the HKMA, with no fixed terms and whose appointment
did not require advice and consent from the legislature,
began promoting himself in the media as Hong Kong's
central banker and actively participating in
international organizations and conferences in that
role, notwithstanding that a central bank with a
currency board regime is an oxymoron.
Market
doubt about the HKMA was confirmed in March 1994, when
the latter announced a change in operating procedures
that went beyond supporting the peg, to begin targeting
the interbank interest rate, which is a central-bank
action, albeit the target would be constrained by the US
Fed Fund rate target set by the Fed. The switch to
interest-rate targeting greatly increased the market
presence of the HKMA and, to many observers, was the
clearest signal of all that perhaps Hong Kong was not
willing to defend the peg at all cost.
The HKMA
can set one price for its currency, either the exchange
rate or the interest rate but not both, as the
Mundell-Fleming model decrees. The Mundell-Fleming
thesis, for which economist Robert Mundell won the 1999
Nobel Prize, states that in international finance, a
government has the choice between (1) stable exchange
rates, (2) capital mobility and (3) policy autonomy
(full employment/low interest rates, counter-cyclical
fiscal spending, etc). With unregulated global financial
markets, a government can have only two of those three
options.
It became less and less clear that, if
confronted with a choice between the interest rate
targets and the fixed exchange rate, the HKMA would
necessarily choose the exchange rate. This was an open
invitation to currency attacks which broke out
predictably and repeatedly after 1997.
After the
fourth major attack in August 1998, which required an
US$18 billion government "market incursion" to foil, a
list of seven "technical measures" was adopted to shore
up the peg's credibility, among which a Convertibility
Undertaking would obligate the HKMA to guarantee the US
dollar value of the clearing accounts of all licensed
banks. This shifted a large amount of currency risk from
the banks to the HKMA. Now if the peg were abandoned,
the government would have to make up for losses on at
least some of the banks' Hong Kong dollar-denominated
assets, a commitment enforceable by law. This technical
measure substantially increased the cost of de-pegging
and raised the pain threshold of the peg.
Another key measure was to allow banks to use
Exchange Fund bills and notes as collateral for discount
window borrowing. In combination with the Convertibility
Undertaking, this measure effectively guaranteed the US
dollar value of all Exchange Fund paper. These measures
are the equivalent of using the threat of decapitation
to stop complaints of headaches.
With these
measures the monetary base doubled, since the
combination of the existing clearing balances and the
outstanding stock of Exchange Fund paper roughly equals
the outstanding stock of currency. This means that it
will now take a much larger attack to produce a given
increase in interest rates. But of course it would also
be more costly for the government to target the level of
interest rates.
These measures did cause the
large spread between short-term Hong Kong dollar
interest rates and US dollar interest rates to narrow,
but they also increased the costs of discretionary
intervention, without adding fundamentally to stability.
The stakes were raised, but the risk remains unchanged.
The Exchange Fund Advisory Committee (EFAC) of
the HKMA established a Subcommittee on Currency Board
Operations in August 1998 to oversee the operations of
the Currency Board system in Hong Kong. It decided on
August 2, 2000, not to offer an explicit undertaking to
sell Hong Kong dollars at the convertibility undertaking
rate of HK$7.8 for US$1. The HKMA commits itself,
through one-way convertibility, only to buy - but not to
sell - Hong Kong dollars at HK$7.8 per US dollar to fend
off speculative selling of the Hong Kong dollar. The
EFAC's decision of not guaranteeing to sell Hong Kong
dollars at the given rate in effect rules out two-way
convertibility for the time being.
The
advantages of a two-way convertibility undertaking
include greater transparency and predictability, and a
tidier, more symmetrical arrangement. The disadvantages
include the possibility that too rigid an arrangement
would play into the hands of speculators, and the
possibility that too narrow a bid-offer band would
displace a substantial part of foreign exchange business
involving the Hong Kong dollar. Too wide a band, in
contrast, might result in undue volatility in the
exchange rate and other market variables. The EFAC is
concerned that two-way convertibility with one exchange
rate at HK$7.8, or a razor-thin bid-offer band, will
eliminate a large part of the Hong Kong dollar
foreign-exchange market. This will go against the
authorities' efforts to make Hong Kong a major global
financial center, an objective that does not sit well
with the peg.
One-way convertibility in essence
puts a floor on to which the Hong Kong dollar can fall.
By not guaranteeing to sell the local dollar at the
convertibility rate, the HKMA is not imposing a ceiling
up to which the Hong Kong dollar can appreciate. In the
event of heavy capital inflow, as for a brief period
between early 1999 and 2000, some flexibility for
currency appreciation was considered desirable to
prevent the local dollar from being undervalued. The
concern was that an undervalued currency could trigger
inflation and create a bubble economy again.
Two-way convertibility is a strong and rigid
measure to strengthen the credibility of the currency
board system. Suspending two-way convertibility is a
move away from rule-based operation to discretionary
operation.
Capital inflow continued from
mid-2000 through early 2001, due to rising portfolio
allocation toward the Greater China region. Initial
public offerings (IPOs) from local and Chinese companies
attracted more foreign - including the mainland's -
capital to Hong Kong. Hence, the longer-dated Hong Kong
dollar forward could stay at a discount longer. Ample
liquidity in the local system also kept Hong Kong
inter-bank rates low, despite the risk of further rise
in US interest rates.
This presented a peculiar
situation because the currency board system required
Hong Kong's interest rates to rise in tandem with rising
US rates. Indeed, Hong Kong's prime rate and the HKMA's
base rate have tracked US rate moves. But these rates
were irrelevant for local funding purposes because
corporate loans were priced over the inter-bank rates,
such as one- and three-month HIBOR (Hong Kong interbank
offering rate), which were well below both the prime
rate and LIBOR (London interbank offering rate).
Mortgages were also priced significantly below the prime
rate. The base rate is also a non-binding funding
constraint, as banks did not need to borrow from the
HKMA because of ample liquidity in the inter-bank
market.
Heavy capital inflows kept HIBOR and
mortgage rates low, despite currency board restrictions.
Hence, the peg that theoretically ties local
interest-rate movement to US rates was bypassed
temporarily and some observers mistakenly concluded that
as recovery being possible despite of the overvalued
peg. The flushed liquidity conditions helped underpin
local asset prices temporarily until the inflow of
capital dried up by the end of 2001. These events
provided concrete proof that removing the peg can arrest
deflation and restart the economy. Instead of hoping for
a sudden inflow of foreign capital, the government can
repatriate some of its massive foreign reserves to kick
start the depressed economy and the market may not even
devalue the Hong Kong dollar.
Speculation
against the peg will persist as long as there are doubts
about the government's commitment to accept the high
cost of the currency peg. These doubts will intensify
when negative shocks hit again and again. Signs that
China is moving toward more exchange-rate flexibility
will add to Hong Kong's problem because throughout the
Asian crisis, Beijing had pledged to back Hong Kong's
currency peg along with its pledge to keep the yuan
fixed against the US dollar. A change in China's
foreign-exchange regime would inevitably create
uncertainty about Beijing's commitment to support the
peg in case of new financial turbulence.
Despite
half a decade of economic crisis, Hong Kong by many
measures is still a rich city. Yet Hong Kong
policy-making suffers from a poverty-of-ideas syndrome
by virtue of the peg. There is no shortage of creative
ideas both within and outside of government on how to
turn the economy around, but none would work as long as
the peg remains in place.
The sharp and
persistent rise of unemployment in Hong Kong is
structurally linked to the overvalued currency. Wages
have also been falling to compensate for the cost
disadvantage in exports resulting from an overvalued
currency. High unemployment, coupled with falling wages,
may help to offset the loss of cost-competitiveness
imposed by the overvalued peg on the disproportionately
large re-export sector in the Hong Kong economy, but it
affects negatively the local economy by shrinking
aggregate demand. Analyses from several major financial
institutions converge on the consensus that unemployment
will reach 8.1 percent by year's end and could climb to
9 percent by the end of next year and wages and salaries
could fall by 20-40 percent within the next three to
five years if the labor market's underlying structural
problems are not addressed. This is much more serious in
Hong Kong, where there is no unemployment insurance or
assistance, than in most developed economies.
Office workers in Hong Kong command salaries 10
times as high as their counterparts in nearby Shenzhen
Special Economic Zone (SEC), where office rent is also
much lower. But deflation in Hong Kong alone would not
close the wage and rent gap between the Pearl River
Delta and Hong Kong as long as the peg remains. Serious
and persistent jobs-skills mismatch and back-office
relocation out of Hong Kong will continue to be dead
weight on the Hong Kong cost-ineffective economy for a
long time to come.
China is now a global
benchmark for declining manufacturing profit margin,
establishing downward pricing power in almost every
market around the world. China's seemingly inexhaustible
supply of low-wage labor, caused by rising unemployment
that requires a 7 percent growth rate to keep from
rising faster and higher, will make it the global
champion of price competition in manufactured goods and
increasingly in services in the export jungle. Thus for
Hong Kong, deflation through an artificially strong
currency serves no cost-competitive purpose.
The
solution has to come from increased value-added
productivity that can justify reflation, for which the
peg remains the key obstacle. A more fundamental
solution lies in the application of Hong Kong's creative
energy, with strong coordinated encouragement and
assistance among the Hong Kong SAR government, the
central government in Beijing and other local
authorities, particularly in the Pearl River Delta,
aggressively and rapidly to lift wages and create
consumer demand in China.
As long as
price-deflationary pressures from low Chinese wages
exist, asset price deflation will not contribute
significantly to Hong Kong's cost-competitiveness, not
to mention the problem of delayed effects. But asset
price deflation significantly and adversely affect the
financial structure of Hong Kong.
A drastic fall
in market capitalization creates havoc in the
debt-to-equity ratio of all enterprises, downgrading
their credit ratings and exacerbating the debt burden to
crisis proportions. It produces negative-equity problems
for property mortgages, both residential and commercial,
and affects the banking sector, which in Hong Kong has
not been as advanced and sophisticated as in the US in
passing on bank lending risks to credit markets through
debt-securitization. This is partly due to an
underdeveloped government debt market, which is
necessary for anchoring a vibrant debt market.
Thus the phobia of the Hong Kong government
against budget deficits to finance counter-cyclical
spending is misplaced. Without budget deficits even in
down cycles, it is hard for a government bond market to
flourish. The government's budget deficit for fiscal
year ending March 2003 could balloon to HK$70 billion to
HK$75 billion. In a worst-case scenario, the deficit
could hit HK$90 billion, twice the official estimate of
HK$45 billion, about 6 percent of Hong Kong's gross
domestic product (GDP), which raises a red flag
considering a narrow base of tax revenue.
But
this should not be of particular concern if public
spending is directed properly to combat unemployment,
and not on harebrained schemes such as sponsoring
transatlantic yacht races with the Spirit of Hong Kong,
or tacky public relations campaigns with empty slogans
such as "City of Life" and demeaning use of a fussy
Brand Hong Kong logo to promote a great city like the
selling of a new improved toothpaste, or government
investment in dubious schemes such as Disneyland and
Cyberport. The value of Hong Kong's currency can only be
backed by the health of its economy, not the size of its
foreign reserve.
One of the important
developments in mortgage securitization in Hong Kong is
the development of the Hong Kong Mortgage Corp (HKMC)
(set up in March 1997), which is the equivalent of
Fannie Mae (the US Federal National Mortgage
Association), and has begun to acquire pools of
residential mortgages. The portfolio of mortgages held
by the corporation still represents only a small
fraction of the outstanding mortgage loans in Hong Kong.
In Hong Kong's case, not only does the lack of
bank reserve requirements prevent the HKMA from using
open market operations to influence the money supply
directly, the meager size of Hong Kong's government debt
market also makes the interventions by the HKMA less
able to affect real economic activity and inflation or
deflation. The peg prevents the application of the State
Theory of Money, which asserts that the value of a
currency is anchored by the government's authority to
levy taxes, to underpin a vibrant credit market in Hong
Kong. HKMA's effective intervention power in its
monetary policy would improve if the market rather than
the Hong Kong Association of Banks sets interest rates
to minimize the distortion in the relationship between
money supply and interest rates.
The history of
the political impact of hyperinflation has deeply
affected the collective psyche of Asia and Europe. Yet
on July 2, 1997, when the Asian financial crisis began
in Thailand, it had not been triggered by hyperinflation
anywhere in the region. It was triggered by a collapse
of an overvalued Thai currency pegged at a level to the
US dollar that drained foreign-exchange reserves from
the Thai central bank. Generally, in hindsight, it is
indisputable that the conditions leading to the Asian
financial crisis were: unregulated global
foreign-exchange markets and the widespread
international arbitrage on the principle of open
interest parity (in banking parlance: "carry trade");
short-term debts to finance long-term projects;
foreign-currency loans for projects with only
local-currency revenue; and overvalued currencies unable
to adjust to changing market values because of fixed
pegs.
Under these conditions, when a threat of
currency devaluation caused by a dwindling of reserves
emerged, the whole financial house of cards built on
fixed exchange rates collapsed in connected economies in
a chain reaction. Economists call this contagion -
collateral damage to other countries in a linked global
financial market. A local financial crisis then became a
regional crisis within weeks, eventually crossing oceans
to hit Russia and then Brazil, despite belated efforts
of the Group of Seven central banks and the IMF to
contain the contagion.
In Brazil, the government
was forced to allow a short two-day period of 9 percent
devaluation of its peg before it threw in the towel on
January 15, 1999, and suspended foreign-exchange control
and abandoned the peg to allow the Brazilian real to
free-float. Seven years earlier, in 1992, even the
mighty British Treasury had to throw in the towel in its
failed defense of the pound sterling against the
onslaught of the bet against the currency staying in the
Exchange Rate Mechanism from George Soros's hedge fund.
During the first two days of the Brazilian
crisis, the government tried to do a stock purchase,
copying Hong Kong's example of "market incursion" in
August 1998. But it was a non-starter. Hong Kong had to
use US$18 billion in two days to foil the manipulation
of its stock and futures markets on August 29, 1998.
Brazil had only US$30 billion reserve left by January
14, 1999, compared with Hong Kong's US$100 billion, and
the Brazilian market was bigger than Hong Kong's. So the
government decided that it was futile even to try, after
some faked moves failed to spook unimpressed
speculators.
For many years, IMF experts had
touted the myth of the indispensability of fixed
exchange rates for small economies heavily dependent on
external trade, such as Hong Kong, or large free-trade
economies facing high inflation, such as Brazil, in the
context of an international finance architecture set up
by the Bretton Woods regime. The inertia of the status
quo and the lack of hard data on the uncertain effects
of de-pegging had permitted this myth to assume the
characteristics of indisputable truth, even though the
Bretton Woods fixed-exchange-rate regime had been
abandoned since 1991 and deregulation of global
financial markets had totally changed the rules of the
international finance game.
Brazil pegged its
currency to the US dollar as a way of fighting chronic
and severe inflation. When the Real Plan was introduced
in 1994, inflation was 3,000 percent annually. Hong Kong
pegged its currency to the dollar in 1983 to instill
market confidence in the uncertain political climate
around its return to Chinese sovereignty in 1997.
As Hong Kong knows from first-hand experience
since October 1997, the penalties of an overvalued
currency are injuriously high interest rates and runaway
asset deflation, resulting in economic contraction that
produces widespread business failures and high
unemployment, not to mention credit crunches and
illiquidity that threaten potential systemic bank crises
and recurring attacks on the currency through market
manipulation by speculative hedge funds.
The
penalty from overvaluation is exacerbated by the
existence of a bubble created by a previous decade of
undervaluation. On October 23, 1997, a massive
speculative attack took place against the overvalued
Hong Kong dollar. Interbank interest rates soared into
triple digits, and one-month interest rates hit 50
percent. Major attacks occurred again in January, June,
and August of 1998. The prolonged period of high
interest rates took a serious toll on Hong Kong's
economy, which is heavily dependent on the
interest-rate-sensitive real-estate and
financial-services sectors.
There was never any
doubt about Hong Kong's ability to defend its peg to the
US dollar. Instead, the attacks were precipitated by the
market's suspicion that Hong Kong might not be willing
to defend the peg at all costs.
The overvalued
Brazilian currency peg inflicted much pain on the
economy, first in the export sector and subsequently
spreading throughout the entire economy. Both industry
and labor had wanted for a long time a lower-valued
currency (the real) to relieve Brazil from a high (70
percent) interest rate and to revive an export sector
saddled with heavy foreign debt, even if the
pre-devaluation low inflation of 3 percent was expected
to rise as a result.
The crisis in Brazil was
triggered by a moratorium on state debt payments imposed
by the large and wealthy state of Minas Gerais on
January 12, 1999. On January 13, Brazil devalued the
real by 9 percent, having seen its foreign reserves drop
by more than half in the previous five months to US$31
billion. A drain of $1.8 billion from the Brazilian
central bank was recorded the following day. At that
rate, Brazil only had 15 days to go before it would run
out of reserves.
On the morning of January 15,
to stop the financial hemorrhage, Brazil lifted
exchange-rate control entirely and allowed the real to
float freely in the foreign-exchange markets without
central-bank intervention. Within minutes, the real fell
to 1.60 to the dollar from its previous 1.32, but by
day's end settled around 1.43. By the end of the trading
day on January 15, Brazil had managed to halt the flight
of the dollar, with the real down 10.4 percent for the
day and 18 percent from the pegged rate, even though the
market had estimated the real to be overvalued by 30
percent.
In the long run, a gradual float to the
estimated market value was considered reasonable. But
the overvalued currency was allowed to linger too long
and did too much structural damage to the economy, which
continued on a downward slide. The real is now trading
around 3.6 to a dollar.
Still, with a
free-floating currency, Brazil's short-term interest
rate fell from 71.65 percent to 36.11 percent in one day
and the stock market jumped 34 percent on January 15,
1999 from its previous low, with lifting effects
worldwide on other markets. The Dow Jones Industrial
Average (DJIA) rose 219.62 points, or 2.4 percent, to
9,340.55 on that day. US Treasuries dropped sharply,
reversing the flight to quality, pushing yield on
30-year bonds up to 5.12 percent from 5.05 percent. By
7pm on January 15, only $173 million had left Brazil's
foreign-reserves coffer.
In 1999, Brazil had to
face a budget deficit and a $270 billion foreign debt.
But its self-imposed penalty of an overvalued peg was
removed, gaining improved conditions for export and
stimulative effects for domestic demand. However, IMF
conditionalities forced Brazil to adopt austerity
budgetary measures and privatization that prevented
domestic economic development.
With Brazil's
currency free-floating, it was obvious that Argentina's
currency board regime could not hold. Argentina tried
dollarization briefly, but the combined penalty of high
interest rates, asset deflation, reduced exports, trade
deficits and high unemployment finally pushed the
country off the cliff in 2001, defaulting on its $95
billion sovereign debt. Argentina is living proof of the
myth of dollarization as the path to economic security.
In reaction to the failure of the Argentine
currency board system, the HKMA identifies two major
differences between Hong Kong and Argentina: Hong Kong
has the world's fourth-largest foreign-exchange reserves
of $110 billion and it owes zero external sovereign
debt, although some agency and private external debt.
Yet by the same argument, Hong Kong, with such debt-free
conditions, should not need the peg, nor the
self-inflicted pain, to support the fair value of its
currency.
So far in 2002, the Brazilian real has
fallen 38 percent and the spreads on government bonds
have widened to more than 20 percentage points above
10-year US Treasuries on fears that it may default on
its $260 billion government debt. IMF austerity
conditionalities force Brazil to cut social programs at
a time of rising poverty. The result is that the
political liberalization side of neo-liberalism
threatens to produce a leftist government bent on
resisting neo-liberalism, forcing the IMF quickly to put
together another $30 billion rescue package to influence
in vain the pending election.
Those on the right
wing of the Hong Kong political spectrum pushing for
rapid political liberalization and free-market myths
should understand that the democratic process in a
faltering economy will return a radical government of
the left.
Brazil's decision to abandon the peg
was significant because it was the last large economy
that followed, with a fixed currency, free trade, market
deregulation and privatization, the fundamental
components of globalization promoted by neo-liberal
economic theories. The decision represented a de facto
declaration that market valuation of currencies is a
more realistic option than placing faint hope of a
reformed international regulatory regime on capital
movement or control down the road.
The events in
Brazil in the week January 13, 1999, punctured the myth
of the magic of the the fixed currency peg. They also
showed that de-pegging alone without other coordinated
monetary and fiscal policy measures would not be
sufficient to correct a decade of policy abuse.
Hong Kong's situation is not congruent to
Brazil's. Yet Hong Kong has incurred much unnecessary
pain in holding on to the myth of an indispensable peg
for more than five years. For the smart money, Hong
Kong's peg will not hold if US consumer demand drops,
caused by the continuing correction in US equity
markets. That scenario is now reality. As US interest
rates drop, Hong Kong interest rates will follow, albeit
still penalized by a country-risk premium, but Hong
Kong's economy will not benefit because the Fed lowers
US rates in response to falling demand in the US
economy, which is more problematic for Hong Kong's
re-export economy than high interest rates.
Two-year Hong Kong dollar forward contracts
jumped recently on investor fears that the currency peg
with the US dollar could be scrapped in 24 months,
trading at 360 points over the spot rate, up 60 points
in one day, as investors bought contracts to hedge
against local-currency-denominated assets in case the
peg was scrapped, despite persistent and unequivocal
high-level government denial of such eventuality.
A recent Federal Reserve paper suggests that to
avoid a Japanese-style deflation, the United States
should, among other things, allow the US dollar to drop
with an aggressive monetary ease to offset deflationary
pressure. A lower dollar means that US consumers will be
able to afford fewer imports, thus reducing the trade
deficit. A devalued US dollar would ease the pain caused
by the peg in Hong Kong, but the Fed's broad monetary
objective of fewer imports would be deadly for the
export-heavy Hong Kong economy. Thus the peg is really a
lose-lose proposition for Hong Kong.
Even if the
US should decide to pursue a policy of weakening the
dollar, it would not work if every other country decided
to pursue the same predatory devaluation policy, in an
effort to keep its exports competitively priced for the
US consumer. Adam Smith's invisible hand of the market
can quickly lead to market failure. If the United States
goes into a deflationary recession, as more signs are
pointing to that possibility, the rest of the world
would quickly fall into a depression, since the US has
been responsible for 64 percent of the world's growth in
the past decade, mostly by assuming massive debt from
its trading partners.
Even if the dollar should
fall, deflation may still hit the United States,
possibly on a long-term basis. Policy makers around the
world are working hard to cure their economies of
excessive dependence on US consumption before the market
cures their export addiction for them "cold turkey"
style. US policy makers are counting on the expansion of
the huge Chinese domestic market to save the world's
overcapacity economy from total collapse. Until
governments around the world, led by the United States,
Japan, China and the European Union, wake up to the
wisdom of reintroducing counter-cyclical income policies
to raise wages and maintain full employment, the global
deflation hurricane resulting from overcapacity and
anemic demand will not dissipate through market forces
alone.
The SAR government has a socio-political
responsibility to ensure that its crisis-management
measures will distribute the inevitable economic pains
fairly among all segments of the population. A case can
be made that an obstinate currency linkage benefits
mostly those with low-interest US dollar debts, namely
Hong Kong's large property-development corporations and
its banks, at the expense of the local population, who
will continue to service loans denominated in overvalued
Hong Kong dollars, causing their income to dwindle from
a contracting local economy. The government's market
"incursion" in 1998, while justifiable on a technical
basis, benefited mostly large cap companies, leaving the
small and medium enterprises to flounder in the storm.
A leading property tycoon was reported by the
press as having responded forcefully to an inquiry from
Chinese Premier Zhu Rongji during a group meeting in
Beijing with leading Hong Kong business figures about
the effect of removing the peg as the financial
equivalent of an earthquake. One might add that the
epicenter of the earthquake would be the
dollar-denominated debts held by property developers and
their banks.
In many ways, Hong Kong is a victim
of its own residual Cold War propaganda. Hong Kong was
built on colonial monopolistic capitalism, a game in
which the British colonial government enjoyed full
autocratic power to decide winners and losers by the
granting of royal monopolistic charters. During the Cold
War, US geopolitical interests supplanted British
colonial interests with a new set of rhetoric built
around such high-sounding neo-liberal terms as
democracy, free markets and entrepreneurship that
replaced the moral platitudes of the "White Man's
Burden". Hong Kong began to celebrate itself as a
success story of market fundamentalism, rule of law and
inviolable private property rights, institutions that
for more than a century the British never tolerated in
Hong Kong.
The so-called independent judiciary
in British Hong Kong always openly ruled on behalf of
British imperialist interests, while disrespectful
speech toward the British crown or government was a
criminal offense. To put a human face on British
colonialism, the Labour government introduced a measure
of social welfare into the colonial economy, including a
subsidized homeowners scheme for low-income earners.
Under the Conservative government of Margaret Thatcher,
Chris Patten, the quintessential FILTH (Failed in
London, Try Hong Kong), was dispatched to Hong Kong as
its last governor, with a mission to introduce belated
instant democracy, bogus human rights and commercialized
press freedom in the colony in its final years under
colonial rule, in much the same way as Lord Mountbatten
was dispatched to British India and with the same
mission that left India practically ungovernable after
independence, not to mention the partition of British
India into India and Pakistan, a travesty that continues
to threaten peace in Asia. Overnight, the colony of Hong
Kong became the "community".
While the
post-colonial SAR government has adopted a strong
commitment to funding education, aiming to upgrade the
quality of its workers over the long term, spending on
education still amounts to only 7 percent of GDP against
the United States' 10 percent. Many of Hong Kong's
educational institutions remain elitist strongholds of
Anglo-American anti-China propaganda, and colonial
cultural imperialism continues to infest their
institutional culture and curricula, turning out
non-critical-thinking graduates who learn by rote rather
than developing independent and challenging minds.
Even then, the Hong Kong economy is showing
signs of being incapable of absorbing its brain power,
and a brain drain to China and overseas has been in
progress, at times even with the encouragement of a
government helpless in solving its unemployment problems
because of ideological fixation on government
non-interference in the market while it intervenes daily
in the currency market to support a peg that keeps
unemployment high.
Thus Hong Kong is plagued
with a three-tier labor problem: losing its top talents
to other economies, mostly mainland China and the United
States; leaving its low-skilled workers unemployed; and
an economy burdened with cost-ineffective mid-level
workers through an overvalued currency.
Worse
yet, an uncanny combination of Confucian adherence to
outdated tradition and colonial mentality submissive to
cultural imperialism, has managed to suppress creativity
in countless generations and robbed Hong Kong of a
healthy supply of independent intellectual and political
leadership. The Hong Kong government has announced that
"the promotion of entrepreneurship is a cornerstone of
our innovation and technology program". Government
promotion of entrepreneurship is of course an oxymoron.
Hong Kong has never had a tradition of
Jeffersonian democracy in which government should
ideally be controlled by the people with limited power
promoting economic policies aimed at protecting the
welfare of the average citizen rather than the wealthy.
This is due to British colonial policy of limiting the
supply of land and opportunities to ensure political
subservience, in contrast to US president Thomas
Jefferson's time in early US history of abundant land
and equal opportunity.
Even Jefferson himself
regarded individual economic independence as a
prerequisite for political freedom, that every citizen
should actually own enough property for self-sufficiency
or could easily acquire it. Alexander Hamilton, treasury secretary under George Washington, instead favored a strong government and concentration of
wealth in the hand of an enlightened elite who would
invest it wisely to benefit the nation. In that respect,
British colonial economic policy was essentially
Hamiltonian in its preference for government promotion
of business expansion by means of navigation laws,
protective tariffs, and subsidies, except it was
perverted with grants of monopolies to the politically
trustworthy and other industrial policy measures to
enrich not the local economy but the British crown.
British imperialism was built on resistance to
unregulated markets with a strong central authority to
support and protect British imperialist interest
worldwide. The nation-building in 19th century US was
accomplished with a strong central government that
guided and directed economic development. The New Deal
after the 1929 crash greatly expanded the power of the
US government to rein in unregulated markets in the name
of Jeffersonian ideals of protecting the welfare of the
masses.
While even in the United States, the
fountainhead of neo-liberal market fundamentalism,
populist sentiments are currently again on the rise,
crying out for government re-regulation and intervention
on the destructiveness of runaway market failures driven
by systemic fraud, Hong Kong is still fixated on a
governing philosophy that renders government helpless in
the face of economic disaster.
Its time for the
chief executive of the SAR to be a Franklin Roosevelt
and not a Herbert Hoover. Hoover was a victim of a
defunct philosophy of passive government that failed to
protect the needy. His ready willingness during the
Great Depression to give direct government aid to
business while denying it to the unemployed left him
with a historical legacy of ineffective leadership in
time of crisis, despite the fact that he was a man of
high personal integrity and compassion and a
hard-working administrator.
While Hoover limited
himself to the counsel of self-interested businessmen,
Roosevelt had his "Brain Trust" of progressive scholars
and social activists who proposed bold measures to
protect the underdog and to oppose unearned privileges
and ruthless exploitation. Hoover's initial response to
the 1929 crash was that if people only had "confidence"
in themselves, the good times would mysteriously but
predictably return in a "what went down must go back up
before long" fantasy and a platitude of "Americans had
overcome adversity in the past and will do so again by
simply not giving up on themselves". Implied in this
attitude was that economic hardship was the fault of the
victims rather than the system.
When events
failed to cooperate, Hoover shifted to the related tune
that the only way to remedy the economic collapse was to
let it run its natural course without government
"meddling", that the self-compensating laws of the
market would return the economy to good health if left
alone by government. If wages were allowed to sink, that
would reduce cost, thus restoring profit that would lead
again to new hiring in time; that socio-economic
Darwinism of the survival of the fittest would leave the
economy in a stronger state in the end. Long-term
restructuring of the economy was used as a justification
for pervasive and severe pain for the average person.
The government professed deep compassion for the
unemployed and the bankrupt, but alas, it could not do
much and should not be expected to do much to change
natural economic laws.
Hoover ignored the social
and political cost of a logical deflationary program and
refused to guard against the prospect that powerful
business interests would use government to prevent their
own deflation at the expense of the rest of society.
Hoover was captured by corporate interests that had
convinced him that corporate wealth must be protected
first, or all else would collapse.
By allowing
demand to shrink from unemployment and falling wages,
Hoover condemned the US economy and his own political
future to certain demise. To even the casual observer,
the chief executive of the SAR appears to have
faithfully retraced Hoover's footsteps in the past five
years.
While Hong Kong sells itself as Asia's
World City, Shanghai promotes itself as the World's
Asian City. Even Singapore radiates more national pride
than Hong Kong. It is obvious Shanghai has the advantage
of being free of Hong Kong's residual compradore
mentality.
The great modern Chinese writer, Lu
Xun, developed the notion of the "Fake Foreign Devil"
(Jia Yangguizi) as one who assumes the
superficial trappings of Western mannerism as a badge of
social and intellectual superiority. Idiotic utterances,
when expressed in English with an immaculate accent,
couched in misapplied neo-liberal rhetoric, are often
accepted blindly as words of wisdom in Hong Kong. The
roots of Jia Yanguizi die hard even after the demise of
political colonialism, as exemplified by its chief
spokeswoman, the former chief secretary of the civil
service, who even after early retirement from government
continues to run interference for colonial interests in
the media.
The middle-income sector in Hong Kong
has been squeezed mercilessly by economic restructuring,
layoffs and negative property equity. The average
loan-to-value ratio was at a prudent level of 52 percent
in residential mortgages in Hong Kong in September 1997.
With property value falling by 60 percent since 1997, an
average negative equity of 12 percent of peak value
resulted. In other words, a property with a peak value
of US$100,000 now commands a market price of $40,000 and
a mortgage of $52,000. If the owner were to walk a way
from the property, he or she will still owe the banks
$52,000 less what the bank could sell the property for
plus foreclosure fees.
The question of course is
not price stability but how stabilization is to be
achieved, through improving fundamentals or through
market manipulation. The Convertibility Undertaking
obligates the HKMA to guarantee the US dollar value of
the clearing accounts of all licensed banks. By the same
logic, the HKMA should guarantee the equity value of
mortgages on all owner-occupied primary residences,
since the fall of property values is largely caused by
the overvalued peg.
The financial secretary said
he saw the importance of swiftly finalizing measures to
stabilize the property market to boost consumer
spending, which is Hong Kong's major economic growth
driver. The government believes that stabilizing the
property market is one of the solutions to encouraging
consumer spending and economic growth. Yet halting the
sale of Home Ownership Scheme flats is a measure that
unfairly puts disproportional pain on the low-income
sector.
Developers cannot merely ask the
government to reduce supply so that they can increase
supply from their inventory at high prices. If a
stabilization of property values is in the public
interest, both the government and the private sector
must bear equally the cost of such a measure. In truth,
government land sales are a hidden tax on the economy
and and high land values represent a high tax rate. Hong
Kong's self-congratulatory theme of being a low-tax
locality is mere self-deception. The private sector
cannot expect the government to reduce its major source
of revenue and run a balanced budget.
The civil
service has been unfairly faulted for having the
authority but not the individual responsibility of
having to answer for policy mistakes. Some critics point
out that no civil servant in Hong Kong ever resigned for
policies that went wrong, and could hide behind the
shield of "collective responsibility" - even the fiasco
of the ill-fated opening of the new airport failed to
bring down the then chief secretary, who merely
apologized for her negligence. This argument led to the
new ministerial accountability system in Chief Executive
Tung Chee-hwa's second and final term.
Yet the
new accountability system carries with it a danger of
obstinate defensiveness on erroneous policies merely to
escape accountability. When policies are deemed correct,
accountability becomes a mute issue, even if results are
found wanting. The scandals over the handling of
delisting on the Hong Kong Stock Exchange is an example.
No resignation is necessary because the errors were
deemed not grave enough. To a more fundamental degree,
the peg has been declared as a correct policy, thus
enormous energy is devoted to justifying it and
minimizing acknowledgment of its adverse impacts, while
removing it is the obvious solution.
It is
government by spin-doctoring, by insisting on a
government monopoly on truth in the face of obvious
facts. Undeniable facts then are categorized as natural
results of life or external factors beyond the control
of government.
Tung himself has been a source of
policy vicissitude in the past five years, which is
actually a positive sign, for having the courage to
change policies in response to changing conditions is
the hallmark of leadership. Yet the new secretarial
appointees do not appear to have been selected for their
known policy stands - a number of the key appointees are
scions of successful business dynasties who may in fact
be very capable businessmen but are yet to be tested in
political courage or policy insight. To such people,
accountability may mean a return to their previous
stations of private comfort.
The "rounding up
the usual suspects" approach of governance will not
work. Without radical policy change, persistent
deflation, high employment and falling government
revenue will eventually cause the market to reassess
credit risks in the Hong Kong economy, which will call
into question the stability of the currency peg itself.
Hong Kong's fiscal problems are structural, as well as
cyclical. Employees in Hong Kong carry an average per
capita debt load of US$31,344, which exacerbates the
fear of sudden unemployment and helps to explain the
stagnation of retail spending. Hong Kong should take
orderly steps to rid itself of the peg before the market
does so for it.
Hong Kong's trade with mainland
China now accounts for about 40 percent of its trade
volume, while its trade with the United States is less
than 14 percent. When the peg to the US dollar was
adopted, the US was Hong Kong's No 1 trading partner.
Today Hong Kong's trade with the mainland is almost
three times as great as that with the United States. In
the near future, when China allows its currency to be
convertible for capital transactions and its money
markets become more developed, Hong Kong will logically
realign its dollar with the yuan rather than the dollar.
Dropping the peg would not spell the end of Hong
Kong's economic woes. To paraphrase Winston Churchill,
it would not even be the beginning of the end. It would,
however, be the end of the beginning, by allowing elbow
room for innovative and bold policies and measures, and
would free Hong Kong from its current policy paralysis.
Henry C K Liu is chairman of the New
York-based Liu Investment Group.
(©2002 Asia
Times Online Co, Ltd. All rights reserved. Please
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