Time to cut the HK dollar loose?

For a quarter century, the Hong Kong dollar has been tied to the U.S. dollar, trading at a fixed exchange of about 7.8 HK dollars to one U.S. greenback. This longstanding peg has provided the economy with stability and certainty. But it’s also been a straitjacket of sorts.

During the Asian economic crisis a decade ago, Hong Kong endured deflation as much of the rest of the region melted down.

Now, riding atop booming growth, and sitting at the doorstep of the roaring Chinese economy, Hong Kong faces different problems. There’s too much cash sloshing around.

So is it time to cut the Hong Kong dollar loose? That's the view William Pesek, a prominent Bloomberg columnist, offers today.

Pesek says that while the U.S. Federal Reserve slashes interest rates, hoping to stimulate a stagnant U.S. economy, Hong Kong authorities are playing with fire by following suit. The booming trade hub doesn’t need greater liquidity, he says.

“Inflation pressures are building and asset bubbles are growing. In 2007 alone, residential rents climbed 13 percent from a year earlier, while luxury apartment rents jumped 27 percent. That was when the Fed's overnight lending rate was above 4 percent. It's now 3 percent and likely to go even lower. That may lead to increased buying of real estate and stocks given the negligible interest on bank accounts.

Inflation is but one concern here. Recruitment will become even harder as a falling exchange rate reduces salaries on a relative basis. For a city that views itself as the gateway to mainland China, not being able to attract the best and brightest from London, New York, Sydney, Tokyo and elsewhere is a bigger problem than government officials may realize.

The city's worsening air quality is enough of a disincentive for many expatriates. The last thing Hong Kong wants is to lose its competitiveness.”

It’s unlikely Hong Kong monetary authorities will do anything soon. After all, it may not even be their call. Beijing now makes the major decisions on Hong Kong. Logically, if the Chinese yuan were freely convertible, the Hong Kong dollar should be tied to the yuan.

Any guesses when that might happen?

Comments

[A B]

It depends on what part of HK you are talking about.

Vast parts of HK are not competitive with the mainland, such as the Container port, retail, etc.

Many parts of the economy also face increasing competition from China, so it is not at all certain that HK is going to be competitive over the long run.

Do not confuse the perks HK received, like the rush of capital (illicit or legally) to invest in the HK stock market, etc. that are a product of Beijing's policies to favor HK which are not sustainable over the long term, with bona fide competitiveness.

There are vast stretches of the HK economy, like the higher education system, that is woefully uncompetitive and third rate despite the amount of resources poured into it.

The civil service is also bloated and far larger than it needs to be for an ostensibly free market economy.

Above all, do not underestimate Chinese in China, who will, over time, overtake HK.

In this context, the best thing to happen would be to delink the currency, and let it float.

[Kermit]

THE CHINESE ARE SUBHUMAN

STOP COMMUNIST CHINA NOW

I find it continually sickening that The News and Internet Business Community has this frightening enthusiasm for China’s industrialization.

China is a Communist Country.

China is a sworn enemy of the United States.

China has destroyed job creation the US.

China is not innocent; they are an evil government with sights on our economy.

Why do you News and Internet people love China so much? Are you enjoying being an active participant in ruining the hopes of working Americans while lining the pockets of Communist Chinese Families? Shame on you!

I think Lou Dobbs needs to know how The News Media is aiding and abetting the enemy.

Is The News Media a Communist organization? - We know it is.

The best thing that could happen to China is a few nuclear warheads.

[lionheart]

im with you kermit

[chinese buddhist]

"kermit" & "lionheart": YUP. Your names define you: non-existent phantasms & undoubtedly penniless, to boot. Your hot-air is as futile as your wallets.

[Pffefer]

Kermit, I know our public schools are bad, but I didn't know they were this bad.

No child left behind? :-)

[Sammy B]

Gimma a break. The U.S. has been pimpin' Asia and the rest of the world for years now. But when a country like China finally has the balls to stand up and fight back with a trade war, the Yanks start crying like little bitches. Awesome. U.S.A. is helpless to fight off China and they know it, China beating the U.S. in buying off African oil producing countries like Angola. U.S. has no option but to start another fake war in order to clammer for resources like Iraq to fund their spiraling det. Next stop Iran and Mexico. Believe it!

[Marvin Foushee]

When George W Bush appoints Kermit to the Federal Reserve Board of Governors, he will be the sixth Jew on the Board to serve in the Army of World Zionism (Jews Drafted for Jesus).

[Junhui]

I think Mr. Kermit the Frog has mistaken the will of the Chinese government and the will of the Chinese people.

If indeed that the Chinese government is evil and the prophets have indeed written down in the holy texts that the Chinese government is the sworn enemy of our good nation, the United States; we would still have to ask ourselves, "what does that have to do with the people?".

Are the Chinese sub-human because they're Chinese? Or because they're Communist? Are communist CHINESE families less deserving of a fulfilling life than any of our fellow brothers here in the States?

Are you sure the Chinese are taking jobs away from America? Or are Americans taking jobs away from Americans? I suspect we would need to ask the American corporations why they want to operate outside of the U.S. I could just jump the gun and make an assumption; they want to line their own pockets with more money by exploiting cheap labor. Of course; My assumption could be wrong seeing as how I was educated by American public schools.

[Hugo Restall]

The HK$ will eventually be pegged to the yuan, but it's not time yet. The mainland is still a developing economy with all the risks and difficulties for monetary policy that entails, while Hong Kong is a financial center which depends on a stable unit of exchange.
The downside of a currency board is that prices have to be very flexible, inflating during good times and deflating during bad. But all things considered, Hong Kong still benefits from having a fixed currency.