For the past 30 years Hong Kong has maintained the tradition of pegging its official currency, the Hong Kong Dollar, to the US Dollar. This linked exchanged rate system has provided economic stability and credibility to this export-oriented region. However with China abandoning it US dollar peg in 2005, plus the fact that Hong Kong and the US are in different positions in the economic cycle, people are starting to question the validity and the effectiveness of this peg. Dr. Joseph Yam, the previous HKMA chief executive have stated, “there is a need to address the question as to whether the monetary system … can continue to serve the public interest of Hong Kong.”
I believe it is a necessary measure to abandon the currency peg with the US dollar, because it doesn’t work when you try to fit one set of monetary controls on two totally out of sync economies. Whilst the US is currently in a deflationary gap, Hong Kong has been suffering from uncomfortably high inflation and asset bubbles. What US is doing to eliminate to gap, by lowering interest rates, can only push Hong Kong into more inflation. Right now, Hong Kong needs to regain its autonomy in monetary policy, so that it has the freedom to restrict money supply to reduce inflation.
Another problem with the dollar peg is China. China is Hong Kong’s major trading partner, so China influences strongly on Hong Kong’s economy. Now that the Chinese Renminbi is pegged to a basket of currencies, and not the US dollar, Renminbi has been appreciating over the last couple of years in respect to HKD. The increase in value of renminbi means Chinese exports is more expensive in Hong Kong. Businesses relying on such exports may increase their prices leading to cost push inflation. What Hong Kong should do, however, is to take advantage of China’s strong and growing economy, and instead of pegging to the US dollar, should peg to the Renminbi when it becomes a fully convertible currency.
So to summarise, I think Hong Kong should break away from the US dollar straight away and become a free-floating currency (this should work- look at the Singaporean dollar). When the Renminbi is fully recognized internationally, it should be pegged to the Renminbi.
Despite Hong Kong officials’ open opposition to removing the peg with US dollar, I believe the transition is just a matter of time. Of course, this is not a solely economic issue – politics has a lot to do with this. Nevertheless, the Hong Kong dollar should not be pegged to the US dollar as it is a hindrance to Hong Kong’s economic performance.
