Hong Kong Shaken By Yet Another 'Peg' Scare

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

24 September 2002

After a scare ten days ago about the future of the Hong Kong dollar's peg to the US dollar, firmly denied as usual by Financial Secretary Antony Leung Kam-chung, financial markets were thrown back into turmoil last Friday when Apple Daily reported that the Legco Financial Affairs Panel had asked the council's Research and Library Services Division to conduct a study on the peg.

Financial markets panicked and pushed Hong Kong dollar forward rates to a five-month high, at a 2.3 cents premium for the one year rate, up from 0.9 cents on Thursday. The stock market plunged as much as 2.35% in the morning session before recovering to end the day 1.06% down after another strong denial from Antony Leung, and an abrupt about-face by Legco.

What had happened? Responding to constant question marks over the peg, the Legco study had been proposed by Frontier legislator Emily Lau Wai-hing and endorsed by other Financial Affairs Panel members in July. But after Friday's panic, a Panel meeting yesterday afternoon voted unanimously to shelve the project. "The market has had a strong reaction to the news of the study on the peg, and we should ask the division to suspend the work immediately," said legislator Eric Li Ka-cheung, who called the vote.

The Hong Kong dollar is pegged to its US counterpart at a rate of HK$7.8 to US$1, and there are no exchange controls, so that interest rates in the two currencies normally move in tandem.

Markets have been particularly sensitive on the subject of the peg since Ho Cheuk-yuet, head of research and strategy at Bank of China subsidiary BOCI Research, was quoted earlier in September as saying the peg should be abolished. People took this to be somehow a statement on behalf of the Chinese government.

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