Happy 30th!

The Hong Kong government is, more than ever, an overstretched fire department, rushing to douse blazes breaking out faster and faster all over the place. There are demands to ban imports of Philippine bananas to avenge the humiliating seating arrangements Chief Executive CY Leung had to endure when meeting President Aquino recently. There’s this month’s Legislative Council vote of no confidence in the very same victim of insulting seating. There’s the magnificent screw-up over the decision not to give Ricky Wong’s HKTV a broadcasting licence, which ticks every box imaginable from ‘pro-Beijing bias’ to ‘pro-tycoon bias’ to ‘pre-emptive censorship’ to ‘anti-little-guy entrepreneur’ to ‘wow – what an amazing idiot that government minister is’.

Behind all the smoke and the flames and the sound of sirens and shouting, celebrations are taking place to mark the 30th anniversary of the linked exchange rate system that pegs the Hong Kong Dollar solidly to the US one at 7.8 to 1.0, whatever infernos and conflagrations come our way. Financial Secretary John Tsang writes in nearly all newspapers that the peg is great and needn’t change. The SCMP carries him alongside an alternative view, except it’s that of the peg’s founder John Greenwood, also saying the peg is wonderful. Everywhere you look in the SCMP there’s a piece saying the peg’s fantastic, the main alternative is no better, and – over in the gratuitous shoe-shining section – wasn’t Donald Tsang a genius for buying 10% of the stock market in 1998?

Nowhere does anyone suggest that the linked exchange rate might do more harm than good, by forcing Hong Kong at times to have a totally inappropriate monetary policy.

Thanks to the peg, Hong Kong sometimes has interest rates that are too low and thus inflationary when the economy is doing well, and too high and thus deflationary when the economy is in a slump. Thanks to the effects of debt leverage, government policy and local psychology, this especially manifests itself in gyrating property prices. Indeed, it sometimes seems as if the nearest thing we have to an independent interest-rate policy is the ability to manipulate land supply. Tellingly, our officials do it disastrously. The current crisis in availability of affordable housing results from the peg, plus aforementioned genius Donald Tsang’s unfathomable decision as Chief Executive to deliberately create a shortage of affordable homes.

The peg is of course supposed to be about exchange rates. It’s 7.8 to 1.0, always always always, which makes things highly convenient for traders of goods and services, who are the backbone of our economy. It would be a massive pain if they had to keep checking the latest exchange rate and pulling out the calculator and adjusting prices day after day.  So in order to help them we must make a few sacrifices, like have the monetary policy and currency of a country that owes US$17 trillion and is printing billions every week.

The sacrifices include imported inflation, seen as the rising cost of rice, bananas and other food priced in Baht, Pesos and Yuan, and skyrocketing property prices as the investment herd piles into the only wealth-preserving asset class it knows of. In theory, incomes should adjust as well, but this might not always happen perfectly in real life. So it is not impossible that the sacrifices are borne mainly by those on low incomes, for whom pricier food is a big deal, and by those in private-sector housing having to pay crazier prices for even the most basic accommodation. The latter group are screwed even under normal conditions, paying a disproportionate share of government revenue so the rest of us can enjoy Hong Kong’s famous ‘low taxes’ (Alice Poon’s latest thoughts are here, incidentally).

So the peg, like the land system and the (rest of the) fiscal system, benefits some but harms others. To the winners, it is not that the peg offers clear advantages; it’s that alternative systems offer potential disadvantages – from exchange-rate uncertainty to reduced returns from property speculation. To the losers, this must seem perverse. Trading companies would have to do a bit of currency hedging, but in return masses of ordinary people could enjoy more dependable purchasing power for things like food and housing. But the SCMP didn’t invite any of the losers to do a column today.

The peg looks like yet another institutionalized way to enrich the wealthy and impoverish the poor. Scrapping it should be a no-brainer. But then you do have to face the awful prospect of picking another system. Talk of baskets and Yuan pegs are all blather; either you run your own monetary policy or you don’t. So you float the Hong Kong Dollar. And then you control your own interest rates like real grown-ups do, or rather you have to find a trustworthy mechanism and trustworthy people to do that job.  And you look around at the Joseph Yams, Donald Tsangs, John Tsangs, Norman Chans, and suddenly the peg looks a lot better after all.


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13 Responses to Happy 30th!

  1. Gumshoe says:

    Although I tend to wield Occam’s Razor and chalk the whole TV thing up to government ineptitude and systemic corruption, it does fill all the criteria for Mainland interference and shoe shining, as well. The one thing that remains from all angles is that the Legco have really stepped into a huge pile this time.

  2. PropertyDeveloper says:

    Confirmation, again, that yours is the most entertaining and most informative of the blogs. You even respond (?) to those amongst us who claim you are not left-wing enough by demonstrating who the peg benefits; and your elegant final pirouette allows you to present a (fairly) balanced view.

    I read somewhere (Sunday’s PCMP?) that the HK$ would rise 40% if allowed to float freely, but since we have $7.512345 tn invested abroad, the value of the investment would drop about 13%, or something like that.

    Your explanation of the manic-depressively cyclical nature of the economy in terms of both the peg and local culture is spot on. I would just question whether property prices are really still “skyrocketing” at the moment?

  3. maugrim says:

    How could HK ever have monetary policy, they don’t even have an accurate budget? Monetary policy would imply that our Central Bank, have ‘policies’ independent of Government. They would have to have objectives in mind and stick to them for the good of the HK economy. Monetary targeting? Medium term objectives? Cyclical and counter-cyclical policies? It won’t happen. Apart from the fact that HK no longer has the ability to plan with prudent objectives in mind, as soon as a lobby group ‘wahhed’ about how they were affected, a Central Bank would have pressure placed on them to placate them. Besides, anyone knows that a HK Central bank would be for the oligarchs, by the oligarchs anyway, sod any form of wider economic altruism in the city of ‘free markets’.

  4. The Regulator says:

    In refusing to explain its reasons for awarding TV licences and in line with the approach of the MPFA, SFC, HKMA, Insurance Authority and the Depratment of Justice, in HK, the Govt once again specialises in making “secret” law.

  5. Xiaoyao says:

    To me, your closing point is the key consideration. Looking at the prices of imported goods in the supermarket, I sometimes wish we had a free-floating HKD. But consider who’d be setting monetary policy. The safer bet is to stick with 7.8.

  6. gweiloeye says:

    Hong Kong has free to air television? I’ve never noticed. Oh hold on I lie, they do a great High Def transmission of the Horse Racing…is there anything else?

  7. Gumshoe says:

    Legco is the only thing more boring and dry than English broadcast media in Hong Kong.

  8. Long John Silver says:

    “Indeed, it sometimes seems as if the nearest thing we have to an independent interest-rate policy is the ability to manipulate land supply. Tellingly, our officials do it disastrously. ”

    So why would it be a good idea to give the same people the opportunity to carry out a real monetary policy by getting rid of the peg?

  9. Mary Hinge says:

    Long John S, I am guessing you only made it halfway through today’s blog. Or, at least, you gave up before the final stanza.

  10. PropertyDeveloper says:

    Fine letter from Audrey Eu, who I ‘m sure won’t mind me sharing it:

    With an aberrant government, turn anger into energy
    Just as I thought news is quietening down, the Chief Executive gives us some more talking points to further bring down his sinking popularity.
    Ten years ago when it was said that C Y Leung would be interested in running for the chief executive, there were already a lot of rumours as to his negative personality. With my background training in procedures and evidence, I asked for proof. Give me some examples as to sort of things that he had said or done, don’t judge on rumours. The interesting thing is that he didn’t have that many friends. Not many people could claim to really know him or point to anything concrete. The most “concrete” example I heard was that if Beijing was to give him instructions to arrest 10 people, he would arrest 100 just to be sure. That, I said, was not proof. Later there was the high profile court case where a judge found C Y Leung to be an unreliable witness. But then you may say that is only the opinion of one judge, give him the benefit of the doubt.
    I was prepared for his conservatism. I never expected him to be forthcoming in constitutional reform. But at least I expected him to be smart. I was totally unprepared for his stupidity.
    He always blames the media and the democrats for giving him a hard time. But with the trouble that his allies and his “fans” have been giving him, he really doesn’t need enemies. Recently, I come to realize that he doesn’t even need his friends to give him trouble; he is his own worst enemy. He digs his own grave.
    For example, even the blundering Secretary for Education Eddie Ng had the sense to say in August that the teacher Lam incident should be laid to rest, but the following week C Y Leung stoked up fire again by making a high profile speech at the Yuen Long open forum ordering Eddie Ng to make a report into the teacher Lam incident and by demanding apology for his two exco members who resigned after personal scandals.
    Events this month are also telling. I find it incredible that C Y Leung would even consider hiring Andrew Fung as his new information co-ordinator. How can he blame anyone for the members of his cabinet falling off one after another if he has no judgment as to the type of people he appoints in the first place?
    The most charitable view to be taken as to his embarrassment at the APEC summit is that green and inexperienced in international affairs, C Y Leung was no match for the cunning Aquino III of the Philippines. The CE’s blunder, coming 3 years after the Manila hostage crisis, re-opens wound.
    But what can you say about the most recent decision of the CE-in-Council not to give a free TV licence to Ricky Wong’s Hong Kong Television Network! The decision broke every rule in the book. It runs counter to the long announced government policy that there is no cap on the number of free TV licences; it runs counter to the commitment to encourage creative industries; it runs counter to the principle of free market competition. Ricky Wong sold his previous broadband business for $5.3billion to buy land for a station, to recruit hundreds of employees including top notch specialists in the field and to pre shoot hundreds of hours of drama series (the trial run of one episode on youtube attracted 700,000 hits), all in readiness for the green light. The Communications Authority (previously the Broadcasting Authority) made a positive recommendation two years ago. The public waited – impatiently. The government procrastinated – inexplicably. Finally the decision came this week – a licence to the other two applicants but not Wong. The government has ousted the contender with the most sincerity and commitment. No explanation is given other than “a basket of criteria”. There is no appeal.
    To give all this a positive spin, I finally find something I can thank C Y Leung for. In our fight for real universal suffrage, it is not easy to explain to the general public the difference between real and fake universal suffrage. Why should there be no prescreening for the CE candidate in 2017? Now I can point to the example of the free TV licence and say: here is the small circle of people who think that the public does not know how to choose between different TV stations, since the market can only support 4 TV stations and no more, the elite in the CE-in-council will pre-choose for us. Politics can affect daily lives. To compound the irony, the government line for denying the free licence to Ricky Wong is said to be a “gradual and orderly” opening up of the market, the same words appearing in Articles 45 and 68 of the Basic Law on the implementation of universal suffrage. Yes, you can wait, your time will come……..meanwhile Hong Kong Television Network has announced its painful decision to lay off 320 employees.
    I don’t know about you, but for a long time, when I go home after work and feel bored looking at the TV, I feel ANGRY. I feel the government owes us and owes us big, for denying competition, for stunting creativity and for WASTING TIME.
    Ricky Wong asks if there is still justice in Hong Kong. I say don’t mix up Hong Kong with the Hong Kong government. This government does not represent me. We cannot stand by and watch this government destroy the Hong Kong we know. This Sunday, 3 pm, I am once again going on protest march. With an aberrant government, we have to turn anger into energy.

  11. Joe Blow says:

    Once, and only once, did I have the misfortune of coming eye to eye with CY Lie. I was walking up Battery Path, direction consulate, near the the cathedral, when he got out of, or maybe in, his pimp car. He didn’t know me (who does ?) and I only vaguely knew him (Tofu Brains’ convenor, whatever that is). The sheer arrogance, borderline hatred, that I saw in his look, was unforgettable.

    On the other hand, I once saw Audrey standing in the street, giving an election speech, and she was ‘something else’.

  12. Econ says:

    In 1983, Australia also switched exchange rate policy – in their case to a floating regime. Thirty years on, there is exactly the same smug, self congratulatory back slapping happening there as in HK. In Australia, they talk of the amazing shock-absorbing capability of the economy, and play down the damage caused by the resource-boom high currency to manufacturing, technology, tourism and education. Curiously, much of Australia also seems to be experiencing a property bubble, although not of HK proportions.

  13. Chris Maden says:

    The blog entry was spot-on, as was Audrey’s letter.

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