Hong Kong Monetary Authority Will Maintain Currency Peg To The US Dollar

by Mary Swire, Tax-news.com, Hong Kong

07 May 2001

The Hong Kong Monetary Authority (HKMA) says it does not intend to change its existing currency peg to the US dollar despite the decision of Argentina's economy minister, Domingo Cavallo, to peg his country's currency to the euro as well as the US dollar.

Both Argentina and Hong Kong link their currencies to that of the US dollar and Mr Cavallo's latest action has raised concerns that it may prompt Hong Kong to alter its currency peg as well. However, the HKMA told Dow Jones Newswire that pegging the Hong Kong dollar to 'a basket of currencies would be complex and disruptive, it would lose the simplicity and familiarity of the present regime, which has served Hong Kong well for nearly twenty years.'

The Authority added: 'We have amply demonstrated our ability to cope with fluctuations in the US dollar against other currencies through our flexible internal economic structure.'

Andrew Fung, head of capital markets (Asia) at the Commonwealth Bank of Australia, said Hong Kong would have little to gain from adding the euro to its peg and it would not be effective in helping to boost exports. He explained: 'Trade flows between Hong Kong and Europe are not large enough to justify such a change. Most of the exports from Hong Kong are re-exports from China, our export performance is much more closely linked with the value of the yuan than the strength of the Hong Kong dollar.'

Earlier this year, we reported that it was not unlikely that Hong Kong would eventually replace its current currency pegging against the United States dollar with the yuan. In his address to a Lehman Brothers' conference in February, Russell Jones, global head of foreign exchange research for Lehman Brothers, announced that such a measure would make common sense, saying 'over the last two decades, the Hong Kong economy has become increasingly integrated with the Chinese economy and as they get closer and closer together, it would be more logical to manage its exchange rate along with the yuan.'

The idea is certainly something for the Hong Kong government to think about but it is unlikely that such a large step will be taken in the very near future and it is too early for the government to comment on it. However, as the relationship between Hong Kong and China grows stronger - particularly in political and economic terms - an alignment to the yuan will become more and more feasible.

But for the time being Hong Kong is committed to the US dollar, particularly given that in December last year the implementation of the third and final phase of Hong Kong's US dollar payment system took effect with a new clearing mechanism offering US dollar cheque clearing, utilising the US dollar Real Time Gross Settlement (RTGS) service and the Central Moneymarkets Unit (CMU).

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