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Hong Kong dollar peg debate heats
up
By Carrie Chan
HONG KONG -
There is widening argument over whether Hong Kong's
famous currency peg of HK$7.80 to the US dollar is still
relevant, or whether the special administrative region's
(SAR's) intensifying integration into mainland China
means it should take its currency cues from Beijing
instead.
The debate is rising at a time when
President George W Bush, Treasury Secretary John Snow
and legions of other US officials are blaming China's
pegged yuan partly for the United States' huge trade
deficit and job losses. In Hong Kong's case, after five
years of a slowing economy, the US dollar is falling
against other world currencies and taking the Hong Kong
dollar down with it, alleviating to some extent the
territory's problems with deflation, unemployment and
fiscal deficits.
Recently, the weakening US
dollar prompted the SAR's currency to advance relatively
rapidly as speculators began to bet that it would be
de-linked and floated upward from its customary level.
The telegraphic transfer rate climbed to HK$7.71:US$1
before the Hong Kong Monetary Authority (HKMA), headed
by Joseph Yam, intervened to pour roughly US$360 million
into buying greenbacks. The speculators were thus on the
losing side of a wager that cost them hundreds of
millions of US dollars.
As Yam and a long
succession of other Hong Kong officials have done in the
past, the SAR appears absolutely determined to maintain
the peg system, which, according to legend, saved Hong
Kong's economy after the link was established in 1983 by
the British colonial government in the face of panic
over negotiations by the government of prime minister
Margaret Thatcher to hand over the crown colony to China
in 1997. The peg has remained a bulwark against currency
speculators for two decades.
"We would like to
make clear that there is no scope for short-term demand
management involving monetary policy or banking
supervisory measures. The monetary-policy objective of
Hong Kong is singularly and quantitatively defined as
the linked exchange rate, requiring interest rates to
move in tandem with US interest rates," Yam said in his
October 9 Viewpoint, a column he writes in the HKMA
newsletter.
"There is no harm to have a bit of
constructive ambiguity, if only for the purpose of
making those shorting the Hong Kong dollar realize that
this is not so much of a one-side bet. We are in the
business of ensuring exchange-rate stability, not
bailing out currency speculators," he wrote in his
October 2 Viewpoint.
However, Y C Jao, Yam's
former professor and a faculty member of the School of
Economics and Finance at the University of Hong Kong,
has written two articles this year questioning whether
the pegged-exchange-rate system should be maintained.
There is nothing to be gained at this time in abandoning
the peg, since both the Hong Kong and US economies have
just begun to pick up and the United States is not
likely to raise interest rates soon, he said. But, he
wrote, the current system will not be workable all the
time and, in the long run, the HKMA should come up with
a complete contingency plan as a precaution for any
possible significant change.
Jao and others have
increasingly raised arguments that as Hong Kong has
integrated into mainland China, its economic
relationship with the US has begun to weaken.
Permanently maintaining the pegged system ultimately
could negatively impact Hong Kong's economy. If the
cycle of economic recovery in Hong Kong becomes out of
step with the United States, Jao said, Hong Kong would
have to follow the US in raising interest rates under
the pegged system, which would eventually slow the SAR's
recovery.
For Jao, it is difficult for the HKMA
to offer two-way convertibility since it is not a
note-issuing bank and might not possess enough Hong Kong
dollar reserves to keep the exchange rate beyond a
certain level. It is hard to see when that point might
arrive. According to figures compiled by the authority,
Hong Kong, with 7.5 million people, has reserves in
excess of $115 billion, nearly seven times the total
money in circulation in the territory.
It is
clear that Jao does not share his former pupil's opinion
that the pegged system should be maintained against all
contingencies. In fact, their divergence had already
become clear to the public on May 24 when Jao first
voiced his views.
In suggestions submitted to
the Panel of Financial Affairs of Legislative Council on
the HKMA's administration, the professor also criticized
the remuneration packages of Yam and the entire HKMA as
too high and inappropriate to the weak economy.
"The HKMA claims that the remuneration packages
of its staff is set in reference to companies in the
private sector," he wrote. "If so, this rule also
applies to civil servants. Unfortunately, it is already
scheduled to reduce salary of civil servants by 6
percent in two years' time. If civil servants allow
reductions in salary, why not the HKMA?"
What is
more, he wrote, the HKMA keeps demanding remuneration
packages better than those of civil servants while
warning the government at the same time that failure to
cut civil-servant salaries will ultimately contribute to
higher deficits, eventually posing a threat to the
pegged exchange rate, the primary target the authority
is set up to defend.
In April 2001, the HKMA
lavished HK$3.7 billion of taxpayer money on new
offices, 14 floors in the Tower of International
Financial Center (Phase II), one of the world's tallest
buildings. Upon this controversial move, it explained
that it needed more room to deal with storage of
deposit, insurance, and credit data.
But Jao
attacked: "These functions can be done by civil servants
as well, not necessarily by HKMA. Moreover, civil
servants can do the jobs more cost-effectively, with
much less taxpayers' money. It seems to me that by
insisting on higher payroll [than civil servants], HKMA
has already been deprived of its right of expanding its
staff."
In responding to that criticism, Yam
told the Legislative Council, "Why bother to make a
fuss, since it is only a teacher's blame to his
student?"
Nonetheless, the exchange is
embarrassing. As the chief executive of the HKMA,
responsible for maintaining Hong Kong's financial
system, many felt he should have taken the criticism
more seriously. On the other hand, the fact that the
professor made his criticisms of the current peg system
implicitly is a sign of his unwillingness to embarrass
his former student in public.
But the whole
controversy involves more than an old teacher's advice
or saving the face of his student. The issue of whether
Hong Kong should continue its currency peg to the US
dollar will continue to grow as the SAR's integration
into China continues. At some point, a growing chorus of
voices says, it is Hong Kong' s economic future that
will be at risk.
(Copyright 2003 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com for
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