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.