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The Hong Kong government is unlikely to de-peg the local currency from the US dollar in the foreseeable future as the interest rate in major economies are all near zero, and pegging the Hong Kong dollar to another currency will not raise the city's borrowing cost, said Invesco's Chief Economist John Greenwood, the architect of Hong Kong's currency board.

The US dollar peg, which effectively ties Hong Kong to the US' monetary policy, has raised concerns since last year as it had contributed to inflation and asset bubbles in the city, due to the low interest rate and the new round of quantitative easing the US Federal Reserve adopted following the global financial crisis.

The interest rates in the US, UK and Japan are all too low for Hong Kong, Greenwood admitted, but he stressed that the city has no other currency that it could peg to, where the interest rates are appropriate and the currency is fully convertible.

"There is no other freely convertible currency, to which Hong Kong dollar could be pegged, that does not also have virtually zero interest rate," said Greenwood, "look around the world, the Japanese yen has virtually zero interest rate, the Euro and the Pound (Sterling) also has virtually zero interest rate."

So even if Hong Kong switched to another currency, it would not raise the interest rates in the city, he added.

"The Hong Kong dollar can not be pegged to the yuan, as the Chinese currency is not yet a fully convertible currency; it is a currency that still has exchange controls," Greenwood pointed out. Therefore, it is highly unlikely that Hong Kong government would ever peg the local currency to the yuan as long as capital controls and exchange controls exist.

He said that the key to monetary stability is a stable anchor, whether it is a domestic anchor, (which means) the central bank has the ability to manage the quantity of money and credit, in order to keep the inflation under control; or an external anchor, such as what Hong Kong has: pegging (local currency) to some other currency.

The activity in the Hong Kong dollar-US dollar exchange rate market shows that the city's mechanism is working very effectively, where there is excess demand for Hong Kong dollars or excess supply of US dollars, the HKMA responds by creating additional Hong Kong dollars.

The system is working as expected and appropriately, and there is no reason to change it, said Greenwood.

Echoing Greenwood, Paul Chan, chief investment officer of Asia ex Japan at Invesco, pointed out that allowing Hong Kong dollar to appreciate will do no good for the local economy.

"Let me share my observations in Singapore. The Singapore dollar has been appreciating, but for an open economy, if you have an appreciating currency, you are just attracting more capital inflow into the domestic market," said Chan, adding that with the appreciating Singapore dollars, the asset prices and CPI are all rising in the country.

Learning from the experience of Singapore, de-pegging the Hong Kong dollar from the US dollar will not be the solution for excess capital inflows and high asset prices, he said.

sophiehe@chinadailyhk.com

(HK Edition 01/12/2013 page2)