7.8 today, 7.8 tomorrow – 7.8 for ever?

You wouldn’t have thought that an academic paper attributed to one Professor the Honourable Joseph Yam, GBM, GBS, CBE, JP would attract much interest, but the former HK Monetary Authority boss has created a stir with his proposal to scrap Hong Kong’s currency peg. The flap is not so much over the idea, which isn’t new, but over his decision to disown what is virtually his lifetime’s work – and to do it just weeks before CY Leung, whom he opposed, takes over as the new Chief Executive.

South China Morning Post cartoonist Harry wittily suggests that Yam is trying to divert attention from his role in the Lehman minibonds saga. Or maybe it’s a cry for attention – maybe the retired bureaucrat wants some sinecure jet-setting around as a Dominique Strauss-Kahn with Chinese characteristics on the flamboyant international financial geniuses circuit.

Whatever his reasons, it’s not because he thinks we should scrap the peg. There is only one intellectually coherent alternative to the link to the US Dollar: a free float – and that’s not what Yam proposes. Unfortunately, it comes with a nightmarish snag no-one wants to mention. So we are stuck with the fixed exchange rate, as Yam surely realizes.

We are told that the main advantage to the peg is that we know the exchange rate is always HK$7.8 to US$1, which makes life and international trade and currency transfers nice and predictable. But this is hardly worth what we masochistically have to put up with in return: US interest rates, which are often too low or too high for our own economic circumstances, so we end up with inflation or deflation – and particularly property bubbles and crashes. The real, supreme benefit of the peg is that it is simply not one of the other possible systems. Which are…

Using, or pegging to, the Chinese Yuan – which is absurd, but you have to mention it out of political correctness, and you then have to mumble something about how the time isn’t right because the RMB isn’t convertible. The fact is that pegging to a unit that is ruthlessly manipulated for its own purposes by a communist dictatorship makes far less sense than pegging to the freely floating currency of the world’s strongest and most flexible and innovative, if currently bankrupt, economy. But you can’t put it that way. (Setting your freely traded currency up as a proxy for an unconvertible one would be stupid as well, and Beijing would probably forbid it anyway.)

Pegging to a basket of currencies, as proposed by Yam as of yesterday and many others beforehand. There are all sorts of variants that would allow us to follow an average of other economies’ monetary conditions rather than just those dictated by the Fed. This implies a wider trading range (so we get all those tedious ups and downs from 7.5 to 8.1 to 7.6 day after day) and possibly less inappropriate interest rates (thus a less hysterical property market). In theory, it sounds like having your cake and eating it, and if CY Leung ditches the peg this is what he will go for. In practice, you’re looking at pegging to a bit of Swiss Franc, a bit of Sterling, a bit of Yen and Aussie and Canadian dollars – but mostly the same debased US Dollar we use today, and its even more horrifying counterpart, the euro. The outcome could be the worst of both worlds. We’d still be stuck with other countries’ monetary policies. Even worse: our local officials could dabble by tweaking the basket’s exact composition. Which leads us to the impossible ideal.

A freely floating currency. The official reason this is a no-no is that we are too small and vulnerable to have our own unit. It could bounce around all over the place (imagine what it would do during a SARS outbreak) and we would need to keep reserves to defend it. There is something in this; Hong Kong adopted the peg because its people lost confidence in their own, floating, currency during handover jitters back in the early 1980s. Looking on the bright side, a free float would have a libertarian ideological integrity to be proud of. It would also put an end to the demented yo-yoing of local property prices. That’s because we could adjust interest rates to suit our own economic conditions, which sounds good until we ask ourselves: who does the adjusting? Could it be the sort of idiots who generally run Hong Kong because the paranoid Communist Party in Beijing doesn’t trust anyone else here? Yes it could. The idea of a CH Tung or a Donald Tsang or a CY Leung tweaking the monetary policy dial in a blind panic every 30 minutes doesn’t bear thinking about. But of course no-one mentions this.

So the masochistic 7.8 it is - logically, anyway, in the absence of top-quality independent monetary policy-making skills, which are in pretty short supply worldwide right now, let alone in Central. That said, if anyone is going to scrap the peg, it is CY; he must have noticed how much Singapore’s micro-managers enjoy playing with their own secret basket of currencies.

Could it be that Yam is anticipating this, and wants to pre-empt the move as elder statesman who supported CY’s rival Henry Tang? He could say ‘I told you so’ if it goes wrong (he makes a big fuss in his paper about the possibility of Hong Kong lapsing into big government and budget deficits, and [in para 89] even mentions the CY-associated word ‘populism’). He could claim some credit, after years of defending the peg, if it works.

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11 Responses to 7.8 today, 7.8 tomorrow – 7.8 for ever?

  1. maugrim says:

    The fluctuating exchange rate would be amusing to watch a certain type of HK traveller, usually a tall man with a shorter, vole faced wife, tear their hair out at finding the best rate to the yen or whatever to the nearest HK cent, even if it means forgetting everything else, including the whole purpose of travelling and having some fun.

  2. Milton Friedman formerly known as Bela Lugosi says:

    Only in Hong Kong would the pronouncements of a failed retired civil servant with a self-coiffured Beatle haircut be taken seriously.

    The preoccupation with money in Hong Kong ultimately owes its origins in the delusion many people in Hong Kong have that they live a luxury lifestyle and that they are “rich”.

  3. another tax payer says:

    I think it suits are bunch of brainless beurocrats to be able to just follow another country’s monetary policy, without needing to make a decision themselves. For that reason, the peg stays with the U.S

    We are enjoying the upside now with super low mortgage rates, the HKD is said to be maybe 25% under valued which suits those in the export business in HK just fine. Afterall its been a global race to have the lowest valued currency for the past few years and HK’s done ok out of it

  4. You mean to tell me the HK$ didn’t switch to a peg to the yuan after SARS? It’s just that the peg to the US$ is the market-correct facade and it makes a nice proxy to the yuan, since the yuan is soft-pegged to the US$

    And let’s face it, the HK property market is minimally affected by trivialities like US interest rates. Raising interest rates here at the beginning of the latest run would have done near-zilch to dampen the bubble, which was driven by the currency printing prices on the mainland (but the CCP is perfect, so none shall criticise that which is perfect) and knowledge that the HK government has institutionalised the property market as a one-way financial bet.

    If Yam and friends weren’t so busy counting the skim on the hot money from the mainland churning through HK (probably mostly in contravention of mainland cash controls) and watching their government reserve funds swell, they might have had a little time to develop a system that properly served the people of HK and not just the “grassroots” and “elite” shoe-shiners.

  5. Stephen says:

    One benefit of the colonial government was that when the Governors & Administrators retired, they left. Usually for some leafy village in the home counties and we never heard from them again. Of course the noticable exception is Sir David Aching Bones (how we would have wished…)

    However what are the SAR Administrators to do especially one with an ego as rampant as Joseph Yam? Especially now that Legco has had the audacity to criticise him and his pick of dimwit Henry was scuttled by PRC. Couldn’t he go and live in China so they could benefit from his planet size brain ? Or perhaps a file could be opened and he can join R. Hui, T & R Kwok, D.Tsang and J. Lau (and counting) in a meteoric fall from grace?

  6. PropertyDeveloper says:

    Nothing like the HK$ to get a good discussion going. I have no particular poisition on this question, so will merely make a few disconnected points.

    If HK’s economy roughly follows those of Europe, the US and the mainland in equal measures, why not link it to an equally weighted basket of the world’s three major currencies?

    If populism and democracy share linguistic roots, it may go some way to explain why no part of China has ever had democracy.

    Advice in HK is very rarely disinterested; people seem unable to empathise, to put themselves in other people’s shoes. A corollary is that apparently innocuous proposals, seemingly making some sense, should invariably be fought tooth and nail.

  7. PropertyDeveloper says:

    On reflection, I suppose that any move that takes us away from a peg to the US$, which hitherto has had a loose leash to the CNY, is unthinkable, since it would be tantamount to an autonomous policy, which itself would raise suspicions that independence — oops, sorry, it just slipped out. I meant, of course, independence of thought was possible.

  8. Bigot says:

    Only in Hong Kong can we find a self-proclaimed chalatan central banker who has no monetary policy.

  9. Real Tax Payer says:

    How many contributors to The Big Lychee lived through the 1983 ( or was it 1982 ? ) free-fall of the HK$?

    I did, and I never want to go through that again

    Read Jake’s op-ed in today’s ( THURSDAY) SCMP.

    I will post it later under Wednesday’s comments for the benefit of those who can’t get it on line

    The peg is like democracy : it’s the worst system in the world , apart from all the other systems

  10. Real Tax Payer says:

    Dollar peg has its drawbacks, but we have no alternative
    Independent monetary policy entails a central banker who can stand up to the government
    JAKE’S VIEW
    Jake van der Kamp
    Jun 14, 2012

    Former central banker sends shockwaves through city by calling into question link to US dollar …
    South China Morning Post (SEHK: 0583, announcements, news) ,
    June 13
    I can picture our former monetary chief, Joseph Yam Chi-kwong, scratching his head yesterday. Since the peg to the US dollar was adopted in 1983, people of influence in this town have often called for its dissolution. Sometimes only Joe was there to hold the line with a firm “No”.

    Now he has himself come out to say that there are costs as well as benefits to the peg, that it is not cast in steel, and that we may have to consider modifying it at some point.

    And what was the response but a resounding “Oh no, we can’t have that, Joe” from all the people of influence in this town. Sometimes you just can’t win. Joe certainly hasn’t been on a winning streak lately.

    The monetary authority, however, has a committee that meets regularly to discuss how well the peg is doing. This has long included economist John Greenwood, who originally proposed the idea of a peg.

    The committee has no qualms about discussing the peg’s future. Its members would consider themselves irresponsible if they did not. But if they do it in public, they risk encouraging speculation against the peg, and then any worries they may have about its future could become a self-fulfilling sentence of doom for it.

    If the monetary authority decides to drop the peg, it has to do it as a surprise. That’s the way of monetary policy around the world.

    And that’s why Joe was out of line in publishing a paper calling the peg’s future into doubt. The points he raised were perfectly legitimate, but his retirement from the monetary authority is still too recent. He should have had someone else write that paper. Silence should still be golden to him.

    As everyone else has offered an opinion on Joe’s thoughts, however, why not me, too? I am for keeping the peg exactly as it is, no exchange rate against a basket of currencies, no sliding this, no moving target that.

    And the reason for my stance is the same reason we adopted the peg in the first place. I think there is no alternative or, rather, I am not confident that the only alternative has any real prospect of working.

    Let’s get it straight first of all that the Singapore solution of a managed float is no alternative for us. Singapore currency traders will submit themselves to government edicts that Hong Kong traders would instantly subvert. A wobbly peg might stay in its hole in Singapore. I doubt that it would do so in Hong Kong.

    Let’s remember here that the King of Singapore has real authority, while our equivalent can’t even get his hotel expenses repaid without having to apologise. The Singapore government owns the Sing dollar. The US Federal Reserve Board owns the Hong Kong dollar.

    The Fed owns it because what passed for our own monetary authority in 1983 had made such a shambles of trying to run an independent monetary policy that it had to run to America for the rescue that we call the peg.

    How do we think that we can now manage to float what previously we could only sink?

    It is in my view the key question, because the only real alternative for us is once again to adopt an independent monetary policy and all that it implies – statutory reserves, central bank discount rates and open market operations.

    It could relieve us of such trials to which the peg has subjected us as soaring interest rates or unusually depressed ones and multi-year deflationary periods.

    But it requires a central bank chief who will occasionally stand up to the government that appointed him and inflict monetary pain when all the politicians are screaming for relief.

    Even Europe doesn’t have a central bank like that. In its first real crisis, it has folded up at the very first political push and supplied everyone who has asked with massive infusions of painkillers.

    Ours will do the same. We don’t have the kind of government that can say ‘No’ to a big swing of public pressure or is willing to hire anyone empowered to say ‘No’ on its behalf, not with a Legislative Council and bosses in Beijing ready and able to undermine its every move.

    Let’s stick with the peg as it is, please. Bad as it may be, the alternatives are worse.

    [email protected]

  11. David Webb says:

    You wrote: “There is only one intellectually coherent alternative to the link to the US Dollar: a free float”. Not at all. The most intellectually coherent alternative is dollarisation – adopting the USD as our working currency. The peg is the worst of both worlds, importing someone else’s monetary policy, but always at risk of breaking, so we hoard massive reserves to back it up, and we can’t export surplus liquidity or import it without currency risk. Hit the link for more.

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