Author: CHUNG Yoon Ngan
Date: 06-23-12 23:21
Yam’s call for US dollar de-peg suffers bad timing and cliche
By Violetta Yau
June 23, 2012 - 9:43am http://www.chinadailyapac.com
Out of the blue, the bombshell was dropped by former monetary authority chief Joseph Yam last week, calling for the ditching of the Hong Kong-US dollar peg, which has lasted for almost three decades. No doubt shockwaves were sent across the city and a wave of speculation about his hidden motives.
In his paper entitled “The future of the monetary system of Hong Kong” published by Chinese University, Yam evoked a buzz in town by declaring that the city could “do away with the exchange rate target” as a means to curb inflation and asset bubbles, as well as to respond to changing circumstances in global and regional economies. Asserting that a fixed exchange rate cannot be an end in itself, he wrote, “There is a need to address the question as to whether the monetary system, as currently structured, can continue to serve the public interest.”
What he suggested was that the government may widen or remove the trading band currently between HK$7.75 and HK$7.85 per US dollar, re-pegging with a basket of currencies or even allowing the currency to float freely.
With Yam deemed as a faithful crusader for Hong Kong’s currency peg for the past 29 years, needless to say cynics are quick to conjure up an array of conspiracy theories about the motives behind his U-turn on the currency peg. It is perfectly justifiable to question why Yam, who had staunchly fended off any suggestions of reviewing the linked exchange rate system, and always declared the dollar peg as a pillar of the city’s financial stability, would have a change of heart now and not before.
Why would he choose to release his stunning proposals at such a sensitive time? The new government is preparing to take over on July 1 and will be ill-equipped for drastic monetary change. There’s a worsening financial crisis in Europe and the Chinese mainland’s economic growth is weakening.
Indeed, as our financial chief John Tsang countered, there is nothing new and surprising being raised about the peg’s status. There have been mounting calls from critics and experts over the years for a review of the currency peg. Even former chief executive Tung Chee-hwa contemplated the idea around 1998, when international investors trained their sights on the Hong Kong dollar at the height of the Asian crisis and the SAR government was forced to spend over HK$212 billion to ward off their attacks. In recent years, a renewed call has been sparked as the currency peg was blamed for pushing up inflation because of an appreciating yuan and a weakening US dollar, while the adoption of the America’s low interest rates in Hong Kong fuelled the expansion of asset bubbles.
There must have been many opportunities for Yam to be struck with the need for a review as timely and appropriate and it is for sure that the Monetary Authority has debated this topic many times. If Yam really believed in what he believes now about the need of ditching the dollar peg, he should have done it when he was still in office and not pass this mammoth responsibility onto the new government or his successor.
Everybody knows that this is a very tough task at the peril of one’s political career if de-pegging proves of no avail or is done at a bad time. If Yam did not have the guts to take the risk to overhaul the linked exchange system when in office, why should other high-ranking officials, as well as Leung Chun-ying as the next chief executive, have to follow his advice and take the risk now? Even if his suggestion is well-intentioned, he should have raised it privately with the monetary officials. Raising this issue in an open manner like this would enable him to claim all the credit if the government eventually followed his advice and conducted a review.
Aside from his personal motives, one needs to ask whether it is the right time to de-peg. De-pegging should have been done when the US dollar was at its most unreliable and feeble state, as it was two to three years ago. Now, with the new SAR government fighting to take over with its new agenda in place, the euro becoming more volatile than the US dollar and doubts over the pace of growth in the Chinese mainland, the government has missed the right timing for ditching the dollar peg. As stated by financial chief John Tsang, what better options do we have to re-peg the Hong Kong dollar to other currencies?
That said, the discussion or the study of de-pegging the Hong Kong dollar from the greenback should not be deemed as a taboo or a forbidden zone for all people. As I have stated before, there is a need to review the currency peg because the city’s hands will always be tied by the dollar peg and it will be unable to adjust interest rates or curb inflation and asset bubbles. The only option we have for the moment is to widen the Hong Kong dollar’s trading band against the US unit so as to give more room for the Hong Kong dollar to avoid undue depreciation linked with the weakening US dollar.
The author is a current affairs commentator.