HKMA Says Hong Kong Peg to Stay; Sets Yuan Link Conditions
Chan lists four conditions for city to consider a yuan peg
(Bloomberg) -- Hong Kong’s pegged exchange rate should stay as it has served the city well through financial crises for more than 30 years, the chief of its de facto central bank said.
“Hong Kong is a small and open economy,” Hong Kong Monetary Authority Chief Executive Norman Chan said in a statement as the city approaches the 20th anniversary of Chinese rule. “Keeping a stable exchange rate between the Hong Kong dollar and the U.S. dollar is the most suitable arrangement. We have no need and no intention to change such an effective system.”
The city linked its currency to the greenback in 1983, when negotiations between China and the U.K. over Hong Kong’s return to Chinese rule spurred a capital exodus. The Hong Kong dollar has come under pressure this year amid a widening interest-rate gap with the U.S., with the local exchange rate touching the lowest level since January 2016 on Friday.
Hong Kong’s dollar trades between the permitted range of HK$7.75 and HK$7.85 per greenback. The currency rose 0.03 percent to 7.7982 at 10:56 a.m. local time.
The peg has shown resilience since the change of sovereignty in 1997, surviving a 1998 attack by speculators during financial turmoil in Asia, the 2008-2009 global financial crisis, as well as pro-democracy protests in late 2014.
There has been talk that Hong Kong should switch its peg to the Chinese yuan amid closer economic links. Chan listed four “essential conditions” for such consideration:
- A fully convertible yuan
- Open capital account with no capital controls
- A financial market with sufficient depth and width that allows Hong Kong’s Exchange Fund to hold assets to support the city’s monetary base
- Synchronized economic cycles between Hong Kong and China
Hong Kong’s role as a global financial hub is seen as less consequential to China amid the boom of the world’s second-largest economy. In 1997, China’s gross domestic product was five times the size of the former British colony. Today, it’s about 30 times bigger.
The city won’t be marginalized even when China’s capital account is fully open, HKMA’s Chan said. It remains “an important springboard” for the mainland to the international community, he said.
“Hong Kong has been part of the global financial markets for so many years,” Chan said. “With such an advantage, as long as we aren’t complacent and keep working on our soft skills, there’s still a bright future ahead of us.”
To contact the reporter on this story: Fion Li in Hong Kong at fli59@bloomberg.net.
To contact the editors responsible for this story: John Liu at jliu42@bloomberg.net, John McCluskey, Richard Frost