A Bloomberg op-ed claims that Hong Kong’s dollar peg is in practice over. As evidence, the author points to the fact that local benchmark interest rates are significantly lower than US ones. If the past is any guide, this situation should correct itself, at which time we can say the peg is once more not over in practice. But then, if Hong Kong’s interest rates rise closer to the US level, there will be the usual problems like a softer property market. Which brings the author to the basic point: that the 7.8-to-1 peg should be scrapped because of the damage done to the city by tying its currency to a weakening US dollar.
Most of the arguments for ending the peg have been made before whenever US exchange/interest rates are too low or high to suit local conditions, going back several decades. The difference this time is that – to the easily-worried, at least – we are not just seeing the vagaries of economic cycles, but maybe a US and its currency in permanent, even terminal, decline. This essentially assumes that Trump will declare himself ruler for life, the US will default on its debt, etc.
A quick interlude from David Frum in the Atlantic…
If Trump can incite disturbances in blue states before the midterm elections, he can assert emergency powers to impose federal control over the voting process, which is to say his control. Or he might suspend voting until, in his opinion, order has been restored. Either way, blue-state seats could be rendered vacant for some time.
Cooler/more-naive heads will expect that even the stupidest Americans will notice the drawbacks to Trump’s economic and other chaos, and traditional boring old bumbling governance will be restored in a few years. But if the US goes the way of Rome, the peg would have to be ditched.
What would it be replaced with? As is usually the case with op-eds of this sort, the Bloomberg columnist doesn’t say. She does hint that the trading band could be adjusted to relieve the pressure. The problem with that is that no-one would trust the government not to do the same thing again whenever it feels like it, and everyone would move their cash into other currencies.
Other options are equally unappealing. Floating the HKD would be the obvious way to go, except the currency would then be at the mercy of local monetary and other policy. Currencies of authoritarian states tend to have a hard time winning confidence. Adopting the RMB is the traditional trendy solution, but that brings its own problems: the Yuan is itself tied to the USD; it isn’t freely convertible; plus authoritarian government. That leaves tying the HKD to a basket of currencies, as Singapore does. That has always been seen as more trouble than it’s worth, but if the ‘US is dead’ predictions prove correct, it starts to look like the least-bad choice. In reality, Beijing would make the call.
CE John Lee says the peg will stay. Of course he does. If the authorities ever decide otherwise, you will be the last to be told.
John Chan is at it again…
Why keep the peg? The argument is not economic, but common to HK government: the peg means the HKMA doesn’t need to take any decisions or bear any accountability. Unde rthe peg, HKMA’s role becomes purely technical and administrative and yet its officeholders have the pay and prestige of a central bank.
Shuli Ren – the author of that op-ed – is one of my favorite reads on Bloomberg, but I think she’s wrong on this, at least in the short run. A pegged HKD is still of some use to the Party.
That said, at this point few of my assets are still in HKD and very few are still in HK, period. This party was fun while it lasted, but it’s over. The people I hear defending the future of HK are invariably those who still own property here. Sad!
Journalists don’t understand how the peg works. Hong Kong stock market is disproportionately huge compared to its real economy (despite their respective massive drops). There were a few IPOs like CATL that attracted amounts comparable to the total aggregate balance of HKD liquidities available in orders. That liquidity drain (cash is locked with CCASS during the IPO window) strengthened HKD and forced HKMA to intervene on the lower end of the band in early May, basically tripling liquidity on money markets in the span of 3 days.
Now that this IPO has passed, that massive excess liquidity collapsed the HIBOR rate to 0% (HK’s shrinking real economy didn’t suddenly need 130Bn$) and we have carry trade resuming (people selling HKD for USD to benefit from the interest rate differential). HKD has already reached the opposite trading band and HKMA will have to intervene again in the other direction to drain the liquidity back to acceptable levels in the coming weeks. Funds raised by CATL won’t remain in the HK economy, they’ll either be funneled offshore or onshore, that will also contribute to a return to the normal.
Hong Kong’s only remaining strategic value to the CCP is access to a hard currency in a jurisdiction it controls.
Until the RMB is convertible (which is never whilst the CCP is in power), the peg stays.
Speculation about de-pegging, re-pegging and band-widening is a waste of breath.
Too much pegging going on.
Has the CE changed his name or has he undergone a merger with the equally loathsome movie ‘star’ with similar authoritarian views?
As for the column, not for the first time Shuli Ren has presented some very interesting information then leapt to a conclusion that is straight from the ‘bat faeces’ school. At least she gets halfway there, which is halfway more than most other ‘opinion’ scrawlers in the mainstream media here these days…
Whatever happened to Jake van der Kamp?
Re popo-puppet CE Chan saying the peg stays: once The Party decides otherwise, he won’t find out much before you do.
Has Rectum #4 got a view on pegging?