Goodhart Encourages Talk Of A Renminbi Peg For Hong Kong

by Mary Swire, for LawAndTax-News.com, Hong Kong

29 August 2003

Despite massive financial reserves of US$112bn which can easily withstand current deficits, Hong Kong is subject to periodical fits of nervousness over the local dollar's peg to the US dollar, which has remained in place for more than 20 years. The government routinely dismisses any talk of ditching the dollar - but the SAR's growing financial integration into mainland China raises the prospect of a switch to a renminbi (yuan) peg at some time in the future.

Now former Bank of England official Charles Goodhart has told the South China Morning Post in an interview this week that while he also believes the peg is not in any danger from the mounting budget deficit, he sees a switch to a renminbi peg as a future possibility. A member of the team that set up the dollar peg 20 years ago, Mr Goodhart said: "I think the choice is either a renminbi peg or a dollar peg."

A renminbi peg was an option because the Hong Kong and mainland economies were now so integrated in terms of exports, tourism and other linkages, Mr Goodhart said. Increasing volumes of yuan trading in Hong Kong (much of it illicit) have created yuan balances in the SAR of $10bn, and lenders from Hong Kong have urged the authorities in Beijing to lift restrictions on the trading of the Chinese currency. Some retailers in Hong Kong are beginning to accept the currency, such as supermarket chain ParknShop which then ships the yuan back to China to fund purchases. Banks however are still not permitted to take deposits in the currency which has created the 'frozen' yuan balances now held by many banks.

Chinese officials accept informally that a fully fledged market in yuan exchange is an inevitabilty: "Renminbi (or yuan) circulation in Hong Kong has become a reality, so to create an overseas yuan market is something that is going to happen sooner or later," an official from the Chinese State Administration for Foreign Exchange told Reuters. When this happens, it may be the signal for Hong Kong to move from an exclusive dollar peg to a mixed dollar/renminbi peg, or if the circumstances of China's float are sufficiently encouraging, to go straight to a renminbi peg. The fear in Hong Kong of course is that a 'dirty' float accompanied by loose internal monetary controls would expose Hong Kong's currency to unacceptable risks.

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