As the Hong Kong Monetary Authority (HKMA) repeatedly intervenes to weaken the Hong Kong dollar, speculation is mounting it might break its longstanding currency peg with the US dollar. So will it happen in 2013 and, if so, what might replace the peg?
If you’re an expat in Hong Kong, chances are you’re aware that the Hong Kong dollar (HKD) is pegged to the US dollar, at a rate of $7.80. It’s been that way ever since 17th October 1983, when a spat between then-proprietor Great Britain, and current proprietor China, about Hong Kong’s future, saw investments flood out of the country, leading to the HKD plummeting. In response to that, the Monetary Authority pegged the HKD to the US dollar, and it’s sat there ever since.
Yet, since the global financial crisis, there have been challenges that are now putting pressure on the thirty-year old peg, and causing some to question whether it wouldn’t be better if Hong Kong floated the HKD again, or even pegged it to the Chinese yuan. In particular, the US Federal Reserve is causing problems for the Hong Kong dollar, what with its policy of quantitative easing amounting to printing unlimited sums, in an attempt to kick-start the US economy.
That policy has seen money flood into Hong Kong in unprecedented quantities, forcing the local Monetary Authority to take aggressive action to limit the HK dollar’s strength. In the week of October 22nd 2012 for instance, the HKMA sold some 14.3bn Hong Kong dollars (about $1.85bn US), in an attempt to weaken the currency, and keep it at its $7.80 peg. However the fact is, these investment inflows are enabled by the peg, which makes buying HKD easy.
Given that, what are the chances of the peg breaking in 2013? Well, speaking on June 20th 2012, former head of the HKMA Joseph Yam added weight to the argument for breaking the peg, when he called for a public debate on the issue. He said: “There is a need to address the questions as to whether the monetary system of Hong Kong, as currently structured, can continue to serve the public interest.” Obviously, as a former head of the HKMA, Mr. Yam’s word holds some value.
Yet the argument for breaking the US dollar peg is limited by the fact that, for the moment, there’s really no viable alternative. The HKMA is unlikely to let the Hong Kong dollar float again, because that would risk the same volatility that led to the peg in the first place. Meanwhile, the Chinese yuan is an obvious candidate, except for the fact that it’s still an ‘immature’ currency, held inside a 1.0% band against the US dollar too. It could best be described as ‘not ready.’
Hence, the Hong Kong Monetary Authority is unlikely to break its US dollar peg, at least for the moment. There’s no doubt the case for it is building, as the advantages of tying Hong Kong to US monetary policy diminish, and the Chinese yuan comes into its own. But the transition is unlikely to happen in 2013.
December 5, 2012
Guest author Peter Lavelle is an economic commentator at foreign exchange broker Pure FX. He graduated with a Master’s Degree in Modern Literature from the University of York in 2009, and has been repeatedly published. He currently lives in Madrid, where he’s learning Spanish.