Hong Kong’s pegged exchange rate should stay as it has served the city well through financial crises for more than 30 years, the chief of its de facto central bank said.
“Hong Kong is a small and open economy,” Hong Kong Monetary Authority Chief Executive Norman Chan said in a statement as the city heads for the 20th anniversary of Chinese rule. “Keeping a stable exchange rate between the Hong Kong dollar and the US dollar is the most suitable arrangement. We have no need and no intention to change such an effective system.”
The city linked its currency to the greenback in 1983, when negotiations between China and the UK over Hong Kong’s return to Chinese rule spurred a capital exodus. The peg has shown resilience since the change of sovereignty in 1997, surviving a 1998 attack by speculators during Asia’s financial crisis as well as the 2008-2009 global financial crisis and almost three-months of pro-democracy protests in late 2014. Hong Kong’s dollar trades between the permitted range of HK$7.75 and HK$7.85 per greenback.
There has been talk that Hong Kong should switch its peg to the Chinese yuan amid closer economic links. Chan listed four “essential conditions” for such consideration: A fully convertible yuan. Open capital account with no capital controls. A financial market with sufficient depth and width that allows Hong Kong’s Exchange Fund to hold assets to support the city’s monetary base. Synchronized economic cycles between Hong Kong and China. Bloomberg
Hong Kong’s role as a global financial hub is seen as less consequential to China amid the boom of the world’s second-largest economy. In 1997, China’s gross domestic product was five times the size of the former British colony. Today, it’s about 30 times bigger.
The city won’t be marginalized even when China’s capital account is fully open, HKMA’s Chan said. It remains “an important springboard” for the mainland to the international community, he said.
“Hong Kong has been part of the global financial markets for so many years,” Chan said. “With such an advantage, as long as we aren’t complacent and keep working on our soft skills, there’s still a bright future ahead of us.”