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Attacker Soros lauds SAR for dollar defense
The Standard
Tuesday, June 16, 2009

Billionaire investor George Soros gives credit to the government for its defense of the Hong Kong dollar against his attacks during the Asian financial crisis more than a decade ago.

"I actually think they [Hong Kong's financial officials] did a very great job defending the dollar, so they deserved credit," Soros said in an interview with China Central Television yesterday, 11 years after he and several hedge funds mounted speculative attacks on the currency.

"This is the way how markets function ... there was absolutely nothing wrong with it, and I don't feel any sense of guilt," he said.

"This is the point people have difficulties understanding ... I do speculation in the financial markets, [but] I do so according to the rules that prevail. If it's forbidden to speculate, I won't speculate ... I am a legitimate participant in the financial markets. My action was not moral or immoral. Morality doesn't actually come into it."

Soros said if there were any problems, the regulators would take the blame. Problems stem from those who set the rules of the game, not from the players, he said.

In January 1997, Soros and other global hedge funds began dumping Thai baht in large quantities, putting the exchange rate under immense pressure. They moved to Hong Kong in 1998, dumping the Hong Kong dollar and shorting local stocks and Hang Seng Index futures, after they saw stock and property market bubbles in the SAR.

The speculation was later defeated by the Hong Kong Monetary Authority with the support of then financial secretary Donald Tsang Yam-kuen and HKMA chief executive Joseph Yam Chi-kwong.

As Soros Fund Management's former managing director Rodney Jones put it, "we used to doubt if the HKSAR government's intervention would be effective or not ... From what we see now, the HK government chose the right time to intervene."

Soros, who co-founded the Quantum Fund with Jim Rogers in 1970, told CCTV that Special Drawing Rights might be a suitable currency for a system going forward, "but we are very far from that point at the moment."

For now, Soros thinks people cannot run away from inflation. "The balance sheet of the US Federal Reserve went from US$800 billion (HK$6.24 trillion) in September 2008, to US$2 trillion by the end of the year, and they guarantee another US$7 trillion to US$8 trillion debt, so in total, it's US$10 trillion ... there will be tremendous fear that this will translate into inflation."

He said: "I sell too soon or buy too late, I make many, many mistakes ... the reason I perform better is because I constantly re-examine myself, and I try to correct my mistakes."

 

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The demise of HK's dollar peg comes one small step closer
19 August 2009
South China Morning Post

In two weeks, Hong Kong is planning to kick off its new government bond programme.

On September 2, the Hong Kong Monetary Authority will auction HK$3.5 billion worth of two-year government bonds to banks for onward sale to institutional investors.

Over the next six months, the HKMA intends to auction a further HK$4.5 billion of five and 10-year bonds, and altogether over the next few years, it plans to issue up to HK$100 billion in government debt.

The government's new-found enthusiasm for issuing bonds has caused a lot of head-scratching in the city's financial community in the months since the programme was announced.

It's not as if the government needs to borrow. It managed to turn in a budget surplus last year despite the recession. And with accumulated fiscal reserves of almost HK$500 billion, it doesn't need to borrow even when it does run a deficit.

Nor is there a specially urgent need for a new bond programme to help banks manage their liquidity positions. The government already issues Exchange Fund notes and bills which banks can post as collateral with the HKMA against short-term borrowing.

The government argues that the new programme is intended to develop the Hong Kong dollar bond market.

As things stand at the moment, it certainly looks underdeveloped. As the first chart below shows, at the end of last month, the total value of local-currency bonds listed with the HKMA's Central Moneymarkets Unit stood at HK$177 billion. That might sound a lot, but it's a derisory 1 per cent of Hong Kong's stock market capitalisation. Turnover last month was a paltry HK$12 billion.

Even if you add in other debt instruments such as certificates of deposit, commercial paper, floating-rate notes and asset-backed securities, the Hong Kong dollar debt market still looks puny by regional standards, as the second chart shows.

Yet even though the market is underdeveloped, it is not clear to many financiers that Hong Kong needs a bigger bond market. Our peg to the US dollar means local companies looking to raise debt can access the far deeper and more liquid US dollar bond market with minimal currency risk.

Similarly, Hong Kong institutions can invest their money in a vast array of US dollar bonds, safe in the knowledge that the peg will insulate them from foreign exchange fluctuations.

As a result, many observers conclude that the government's new bond programme is pointless, especially as the proceeds will simply be invested in the Exchange Fund with the sole purpose of generating enough returns to pay the bondholders back again.

Yet there is one very good reason why Hong Kong may need to develop its local-currency debt market, although its implications need some digestion.

At the moment, big local institutions like insurance companies and pension funds hold almost no assets in Hong Kong dollar debt, even though they have trillions of dollars worth of local-currency liabilities. Instead, they hold US dollar debt, which poses no problem because the currency peg eliminates almost all the exchange rate risk.

But if at some point in the future, the Hong Kong government were to ditch the link to the US dollar, in favour, say, of a peg to the yuan, suddenly Hong Kong's pension funds and insurance companies would find themselves facing a vast and potentially ruinous currency mismatch between their assets and liabilities.

The US dollar peg isn't going to be scrapped any time within the next few years. But back in March, Chief Executive Donald Tsang Yam-kuen raised the possibility that Hong Kong could indeed switch to a link with the yuan when the Chinese currency eventually becomes fully convertible.

Before making the change, however, the government would first have to make sure that local institutions were not exposed to a big exchange rate risk between their assets and liabilities. If it didn't, it would be in danger of knocking a massive hole in the savings of Hong Kong's population.

In other words, before it could abandon the US dollar peg, Hong Kong would first have to develop its own local-currency debt market.

Of course, the government's first bond issue in two weeks' time won't mean the end of the US dollar peg any time soon; it will take a decade or more to create a functioning local-currency bond market. Nevertheless, the government's new bond programme may bring the peg's demise one small step closer.

 

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Hong Kong May Drop Its Dollar Peg for Yuan Within Two Years, Barclays Says
Bloomberg

By Shelley Smith - Oct 26, 2010 Hong Kong is likely to ditch its currency peg to the U.S. dollar within two years in favor of a link to the yuan, according to Peter Redward, head of Emerging Asia research at Barclays Plc.

“It could happen quite quickly given the very rapid rise in the circulation of the currency here,” he said today at FinanceAsia’s ‘RMB Rising’ conference in Hong Kong. “We’re probably looking at a 12-to-24 month horizon. Probably not less than 12 months, but I think it could happen sooner than people think.”

The city’s currency has been kept at about HK$7.80 versus the greenback since 1983 and from 2005 allowed to trade up to five cents either side of that level. The yuan has strengthened 24 percent to 6.6616 per dollar since China scrapped a peg in July 2005. Hong Kong’s dollar was little changed at HK$7.7585 as of 4:20 p.m. local time and 12-month forwards were also steady at HK$7.7396, reflecting bets for a 0.2 percent appreciation.

China has ruled Hong Kong since July 1, 1997 and the mainland is the biggest source of visitors to the city and No. 1 trading partner. Yuan deposits in Hong Kong more than doubled to a record 130 billion yuan ($20 billion) in the first eight months of 2010, according to Hong Kong Monetary Authority data, and China’s currency is increasingly being used for cross-border trade and fund raising.

“Watch the volatility,” according to Redward. “When the volatility starts moving that’s the markets telling you something is going on.”

Rising Volatility

One-year implied volatility on the city’s currency, a measure of price swings cited by traders when pricing options, has climbed 0.45 percentage point this month to this year’s high of 1.18 percent. It’s poised for the biggest monthly increase since October 2008. Still, the measure is below the average 1.26 percent reading for the past decade.

Hong Kong’s existing currency peg ties its monetary policy to that of the U.S., which has adopted near-zero interest rates to sustain economic growth following the global financial crisis. Cheap borrowing costs are driving asset prices higher in the city and HKMA Chief Executive Norman Chan said Oct. 18 that a housing bubble poses the biggest threat to financial stability in Asia.

Chan took office in October 2009 and pledged to maintain the city’s fixed exchange rate.

Basic Law

Tim Condon, ING Groep NV’s chief Asia economist, said five years to 10 years is a more realistic timeframe for Hong Kong to link its exchange rate to the yuan, because such a shift can’t happen until China’s currency is fully convertible.

“As I understand it, the Basic Law requires that the Hong Kong dollar has to be linked to a convertible currency,” Singapore-based Condon said at the conference today. “That requires that the yuan become convertible and I think that one to two years seems to be a little bit on the quick side for that process to take place.”

Silver dollars were used as legal tender in Hong Kong until 1935, after which the local currency was fixed to the British pound until 1972 and then U.S. dollars for the following two years, according to the HKMA’s Web site. After 1974 and until 1983 the city allowed its currency to float.

 

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HK must keep dollar peg, no yuan shift -ex-c.banker

BEIJING, Nov 3 (Reuters) - Hong Kong must maintain its peg to the dollar to avoid currency volatility and cannot contemplate a shift to a yuan peg until the Chinese currency is convertible, its former central banker said on Wednesday.

Joseph Yam, ex-chief executive of the Hong Kong Monetary Authority, said that although anchoring to the dollar might lead to asset bubble and inflation risks, the territory would be able to cope through stronger supervision and regulation.

"I genuinely believe that a fixed exchange rate is better than a floating exchange rate system for Hong Kong," Yam told a Bank of America-Merrill Lynch forum.

The Hong Kong dollar <HKD=> fell near the bottom of its band on Wednesday and speculation has increased that the monetary authority will have to adjust the peg to deal with a wave of speculative inflows as the United States loosens its policy.

When asked about the possibility of pegging to the yuan, he said: "If I were still head of the HKMA, and you asked me to move the peg from the U.S. dollar, I'd say, 'Sorry, I cannot do it, because the renminbi is not convertible.'"

However, he also questioned whether convertibility was a must for internationalising the yuan, also called the renminbi, saying that Beijing's gradual approach made sense.

"Many have pointed out the prerequisite that the renminbi should first become freely convertible," he said.

"But at the same time, they have also sounded warnings on the associated risks of capital account liberalisation given that the potency of international finance has time and again proved to be quite difficult to harness," he said.

China has loosened the reins on the use of its currency for trade and investment in Hong Kong, making the territory a key testing ground and stepping stone for internationalisation of the yuan.

The value of trade settled in yuan reached 126.5 billion yuan ($19.0 billion) in the third quarter, up from 48.7 billion yuan in the second quarter, the Chinese central bank said this week. ($1=6.670 Yuan)

 

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HK has no plans to peg HK$ to yuan-HKMA deputy

LONDON, Nov 16 (Reuters) - Hong Kong has no plans to peg its dollar to the yuan, the Hong Kong Monetary Authority's deputy chief executive said on Tuesday. "We have no plan to change the U.S. peg in Hong Kong, it has served us well since 1983 and is a pillar of our stability in terms of monetary and financial areas," Eddie Yue told a conference.

"The renminbi has to be fully convertible to be a reserve currency, otherwise it is technically not feasible."

The loosening of U.S. monetary policy has fanned speculation that Hong Kong might adjust its currency peg to the dollar to avoid inflation and an asset price bubble.

 

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INTERVIEW-HKMA rules out adjusting FX peg

LONDON, Nov 16 (Reuters) - Adjusting the Hong Kong dollar's peg to the U.S. dollar would erode market confidence and the Hong Kong Monetary Authority (HKMA) has no plans to do so, its deputy head said on Tuesday.

HKMA Deputy Chief Executive Eddie Yue also said the territory's currency link to the greenback had served it well for the last 27 years and that it had no plans to peg its currency to the Chinese yuan. "Once you move the goalposts, you can move it again. You will only invite speculators to come and wait for the next move and this will erode confidence in the peg," Yue told Reuters on the sidelines of a conference.

The loosening of U.S. monetary policy has fanned speculation that Hong Kong might adjust its currency peg to the dollar to avoid inflation and an asset price bubble.

Yue dismissed market talk that the exchange rate to the greenback could change from the current central rate of 7.8.

"We see no reason for repegging, as it would affect the credibility of the peg," he said, adding that any adjustment would only trigger more speculation.

Yue said the second round of stimulus measures worth $600 billion announced by the Federal Reserve to stoke U.S. economic recovery would further fuel asset price pressures in Hong Kong and other Asian economies.

"Whether you have adopted a fixed exchange rate or a flexible exchange rate, you feel the same pressure in terms of asset price inflation," he said, adding that this was being felt in Hong Kong primarily through property prices. Housing prices in the territory have risen some 50 percent since the start of 2009, driven by mainland Chinese purchases and low mortgage rates, prompting the government to lower the mortgage loan ceiling and pledge to increase home supply. Hong Kong Financial Secretary John Tsang warned this week that further U.S. quantitative easing could heighten the risk of a property market bubble but said the government was ready to implement further measures. "We are watching the market closely and we will take more action if necessary," Yue said.

NOT MOVING GOALPOSTS

Growing economic integration between the former British colony and mainland China has also sparked off talk Hong Kong might eventually peg its currency to the yuan.

But Yue ruled this out, saying that the territory's economic cycle remained more in sync with that of the U.S. than the mainland, despite the growing use of the yuan in Hong Kong.

"We regard the dollar peg as the pillar of Hong Kong's monetary and financial stability. It has guided us through many economic cycles and crises over the years. We have absolutely no plan to change it," Yue said.

"The renminbi has to be fully convertible to be a reserve currency, otherwise it is technically not feasible."

Yue said there were currency option plays but the authorities had yet to see strong speculative flows into the Hong Kong dollar.

"When we see certain pressures building, we will just deal with it," Yue said, adding that Hong Kong would strive to keep the flow of capital free.

 

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Peg to yuan ruled out
The Standard
Tuesday, March 08, 2011

The Hong Kong dollar will not be delinked from the US dollar and pegged to the yuan instead, Chief Executive Donald Tsang Yam-kuen reiterated yesterday.

Tsang cited the potential fallout on economic development and people's livelihoods for ruling out such a switch.

"Any changes to the existing currency peg will have a direct impact on our economic development and the lives of our citizens. The impact can be huge," he said.

In a speech to students at Peking University, Tsang said that Hong Kong and Shanghai should be cooperating, instead of competing, as financial hubs.

He added that Hong Kong is a good testing ground for the yuan's internationalization and can support less experienced mainland financial institutions in developing financial supervision and currency-related policy manipulation.

Tsang also said Hong Kong can play a role in the mainland's urban development.

He cited the participation of the MTR Corporation in a Beijing subway line as an example of Hong Kong expertise helping to drive urbanization.

Meanwhile, central government liaison office director Peng Qinghua said in Beijing that Hong Kong should increase its influence on the world stage as it transforms itself into an international financial center. Hong Kong should not fear that cooperating with the mainland means losing autonomy.

Commenting on the 12th Five-Year Plan, Tsang said that it is the first time a whole chapter has been dedicated to Hong Kong and Macau in the plan, reflecting the unique contribution the Hong Kong can make to the country.

It also meant Hong Kong can further develop its role as a financial hub. Also, the plan went to great lengths to spell out cooperation between Hong Kong and Guangdong.

 

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HK dollar better if spread: HSBC
The Standard
Wednesday, August 03, 2011

The Hong Kong dollar would be better off linked to a basket of currencies rather than being pegged as it is now to a single currency, HSBC Holdings (0005) chief executive Stuart Gulliver said yesterday.

But there is no immediate need to drop the peg to the US dollar, Gulliver added at a press conference a day after the bank's results were announced.

The Hong Kong Monetary Authority followed up on the suggestion by rejecting it.

"A basket peg remains a fixed exchange rate regime, under which there is no independent monetary policy," a spokesperson said, and there is no intention of scrapping the peg.

On other topics, Gulliver said HSBC does not intend to boost dividends in the near future as its return on equity has not reached a targeted 12 percent. This percentage is based on Basel II international compliance standards. This level of return, however, makes up only 10-10.5 percent of Basel III requirements.

Gulliver also said HSBC will add jobs in some markets from now to 2014 while slashing 30,000 elsewhere - mainly the United States.

"We are planning to hire up to 15,000 people in emerging markets over the next three years," he said, with Brazil, Argentina and Mexico among those that will see more hires.

Five thousand jobs have been slashed in the United States, Britain, France, Latin America and the Middle East since January, but 3,000 people have been hired in Asia.

Asia contributed US$6.8 billion (HK$52.9 billion) - or 59 percent - of pre-tax profits for the period. Hong Kong provided US$3.1 billion.

"The new jobs were a re-allocation of resources," said Peter Wong Tung-shun, the bank's Asia-Pacific chief executive.

The bank is also to list on the Shanghai International Board, but Wong said details of relevant regulations were awaited. HSBC shares rose 1.2 percent to HK$77.90 yesterday.

 

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Ackman to Lose ‘a Lot of Money’ on Hong Kong Currency-Peg Bet, Tsang Says
Nov 9, 2011
Bloomberg

William Ackman, founder of hedge fund Pershing Square Capital Management LP, will “lose a lot of money” on his bet that Hong Kong will amend its currency peg to the dollar, city Chief Executive Donald Tsang said.

Ackman, who netted more than $1 billion on a six-year short bet against the bond insurer MBIA Inc., said in September that he is buying Hong Kong dollar call options. The wagers will make money if Hong Kong changes its three-decade long linkage to the U.S. dollar and allows the currency to rise or if option prices increase before maturity.

“I think he’s going to lose a lot of money on that,” Tsang, 67, said in a Bloomberg Television interview in New York yesterday. The peg is a “very important anchor underpinning Hong Kong growth and Hong Kong’s monetary stability and we are not going to change,” he said. Tsang fended off a speculative attack to weaken the Hong Kong dollar and break the peg when he was finance secretary during the Asian financial crisis in 1998, a policy that involved $15 billion of stock purchases and proved profitable for the city.

Policy makers have kept the currency at about HK$7.80 per dollar since 1983, linking monetary policy to the U.S. Federal Reserve’s. The city’s consumer prices rose 7.9 percent in July, the fastest pace since 1995, partly because the peg deprives the Hong Kong Monetary Authority the option to raise borrowing costs when the Fed keeps benchmark rates near zero. In 2005, the Hong Kong Monetary Authority committed to limiting the currency’s decline to HK$7.85 per dollar and capping gains at HK$7.75.

“For a small place like Hong Kong, if there’s political will to keep the peg, they can probably do it,” said Axel Merk, who holds Hong Kong dollars for his funds at Merk Investments LLC in Paolo Alto, California. “If they say: ‘we’ll keep it,’ That’s the end of that. For the time being, I don’t see any tension in that market.”

Stable Rate Goal

Ackman’s assistant referred questions to a Pershing Square spokeswoman, who declined to comment, and said she couldn’t be identified because of company policy.

Hong Kong needs the peg, which survived the Asian financial crisis in the late 1990s and the global recession three years ago, because the city’s role as a global trade intermediary requires a stable exchange rate, Tsang said.

“We have seen good times and very bad times, but Hong Kong stuck with it,” said Tsang, who will step down as chief executive in June. “We believe it’s going to inspire confidence in the market.”

HSBC Holdings Plc., which owns two of the city’s three biggest banks, expects Hong Kong to keep the peg as the arrangement brings stability to its economy, Paul Mackel, the lender’s head of Asian currency research, said at the Bloomberg Link China Conference in Hong Kong on Oct. 25.

The Hong Kong dollar was little changed at 7.7695 per dollar as of 9:21 a.m. local time.

Awaiting Yuan

The yuan has gained 24 percent against the dollar in the past five years, making the city’s imports from China more expensive. The link will last at least until the yuan becomes fully convertible, “which won’t be tomorrow,” Tsang said in an earlier event in New York on Nov. 7. Hong Kong imported about 45 percent of its food and goods from China in 2011, according to the city’s statistics department.

Hong Kong expects yuan deposits in the city to rise to more than 1 trillion yuan by the end of this year, Financial Secretary John Tsang said in Los Angeles, according to a transcript posted on the government’s website yesterday.

Yuan-denominated savings in Hong Kong may have recorded a “sizable decline” last month on weaker investor demand for the currency, HSBC said in a report on Nov. 2. Deposits in the Chinese currency rose 13.2 billion yuan ($2.1 billion) in September to 622.2 billion yuan, Hong Kong Monetary Authority data show. This year’s average monthly increase is 34.1 billion yuan, and the deposits last fell in October 2009.

‘Most Profitable’

Implied volatility on five-year Hong Kong dollar options, which is one of ingredients for option prices, increased to 7.5 percent today, from 5 percent in July, according to data compiled by Bloomberg. The gauge jumped to 16.8 percent in March 2010, the highest level since at least 2006.

Ackman, 45, said in September that the easiest way for Hong Kong to allow the currency to appreciate would be to change the peg to HK$6 versus per U.S. dollar and then link to the Chinese yuan over three to six years. If it’s successful, it will be the hedge fund’s “most profitable” trade, he said at a conference in New York.

Ackman bought credit-default swaps betting that MBIA’s credit would deteriorate and wrote a 66-page report on the company’s problems in 2002. Shares of Armonk, New York-based MBIA, the world’s largest bond insurer, have tumbled 91 percent in six years through the end of 2008. A short position profits when the price of an asset declines.

 

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Hong Kong's Tang on Dollar Peg, Real Estate

March 8 (Bloomberg) -- Hong Kong chief executive candidate Henry Tang talks about the outlook for the city's currency peg to the U.S. dollar, real estate market, and leadership rival Leung Chun-ying. Hong Kong’s home prices have tripled in the past decade while the median monthly household income has remained almost unchanged at HK$20,000 ($2,579) since the former British colony was handed back to China in 1997, according to government data, fueling resentment over a widening wealth gap. Tang speaks with Rishaad Salamat on Bloomberg Television's "On the Move Asia."

Video Link : http://www.bloomberg.com/video/87942828/

 

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Yam unleashes $ peg furor
The Standard
Wednesday, June 13, 2012

Former monetary authority chief Joseph Yam Chi-kwong dropped a bombshell yesterday by saying it's time to review the long-standing peg between the Hong Kong and US dollars.

But Yam - who for three decades staunchly defended the peg as the best safeguard for Hong Kong's long-term prosperity and stability - was roundly criticized for calling for a review of the peg just weeks before the SAR's new administration takes over.

Senior finance and monetary officials strongly insisted they see no need to change a system that has served Hong Kong well for 29 years.

Lawmakers questioned his motives, while bankers and market watchers wondered whether any changes are indeed necessary.

The incoming administration of Chief Executive-elect Leung Chun-ying also waded into the controversy.

As Yam released his hugely controversial thoughts, outlined in an academic paper, the Hong Kong dollar swung higher by 69 basis points to 7.7535 per US dollar.

But as government officials rushed to reaffirm their support for the peg, the currency gave up nearly all its gains.

Yam, who retired as head of the Hong Kong Monetary Authority in October 2009, helped construct the linked change rate mechanism in 1983.

He is currently an executive vice president of the China Society for Finance and Banking, a think-tank of the People's Bank of China.

Yam held a press briefing to explain the unexpected departure from his long- standing defense of the peg. He said "the circumstances have changed" in that the US dollar has continued to weaken, and that monetary loosening in developed markets has sparked inflation in Hong Kong.

In a paper titled "The future of the monetary system of Hong Kong" published online less than three weeks before the new administration takes office, Yam argues that "asset bubbles have been a feature of Hong Kong's economic development [and have] unsettling and possibly debilitating consequences for society."

He wrote the paper in his capacity as a distinguished research fellow of the Institute of Global Economics and Finance of the Chinese University of Hong Kong.

Yam denied any political motives, saying the timing of the publication of the paper - shortly before Leung's administration takes office - was a mere coincidence.

He said he began writing it after campaigning for losing candidate Henry Tang Ying-yen in the chief executive election.

Yam suggested that the government may widen or remove the trading band [currently between HK$7.75 and HK$7.85 per dollar], re-pegging with a basket of currencies or even allowing the currency to float freely.

"There is a need to address the question as to whether the monetary system, as currently structured, can continue to serve the public interest," he wrote.

Other than exchange rate stability - which the peg guarantees - price stability, high employment and sustained growth are all in the public interest, and monetary policy can help achieve them.

It is also unrealistic to expect the monetary system to serve the domestic needs of its seven million people, while continuing to serve the needs of international financial intermediation between China and the rest of the world while at the same time maintaining monetary and financial stability, Yam wrote.

The peg, he said, has also caused growing concerns about the "yuan premium" getting bigger all the time, leading to mainlanders "eroding the respect" of Hong Kong people.

Moreover, he implicitly slammed the government's lack of motivation to even consider reviewing the peg and for not maintaining appropriate fiscal prudence. "Frankly, I have worries [whether there is] political willingness to pursue prudent macroeconomic policies."

He added: "I don't see financial discipline ... for example, the HK$6,000 [per head given away by Financial Secretary John Tsang Chun-wah last year]."

Yam said, when expressed in Chinese, democracy, public opinion and public standing are "are all just one word away from populism."

Anita Fung Yuen-mei, chairwoman of the Hong Kong Association of Banks, said the peg has been effective over the past three decades.

The system is the best for Hong Kong as a small and export-oriented economy, she said.

Fitch Ratings said it is a fundamental basis of the city's AA+ sovereign rating.

It said Hong Kong's economy is growing well, with sustained budget surplus, and that it would be difficult to grasp what other monetary system could replace the existing mechanism.

 

[hkskyline]

Drop peg at your peril, says expert
The Standard
Monday, June 18, 2012

There's a 50% chance the Hong Kong dollar would depreciate if de- pegged from the US dollar, a Chinese University economist warns.

Speaking at the City Forum yesterday, economics lecturer Stephen Wong Yuen-shan said the peg has served the economy well for years, and he questions whether this is the right time to consider a change.

"Any de-pegging should be done when the Hong Kong dollar is stronger," said Wong, who warned the currency may depreciate if de-pegged from the greenback now, since the financial crises in other countries will take their toll.

Wong also wonders whether the territory has professionals with the practical experience to stabilize price levels once the peg is removed.

"Over the past 30 years, the Hong Kong Monetary Authority has not had to consider any currency policy. I fear it does not have the experience to stabilize price levels."

Two other speakers agreed with Wong and said the HKMA is not studying an exit mechanism.

They refused to speculate on the motives behind the de-pegging suggestion made last week by former HKMA chief executive Joseph Yam Chi-kwong.

Bank of Communications chief economist Law Ka-chung said he fears inflation may soar as it did before the peg was set - reaching as high as 21% at one stage.

 

[hkskyline]

Yam changes tune on dollar peg
The Standard
Thursday, July 12, 2012

Former monetary authority chief Joseph Yam Chi-kwong dropped a bombshell recently by proposing a review of the US dollar peg system.

Now he's trying to defuse the issue. Yam yesterday said he will support the current system if citizens believe it is suitable for the local economy.

"I do not think the system is problematic. I will support it if you believe it can benefit the public under the current financial and monetary regime," he said.

Yam, a leading backer of Henry Tang Ying-yen in the chief executive election, also said that, as a citizen, he supports the new administration led by Leung Chun-ying.

"The new government has a mission and enthusiasm to work for the people. So citizens should give it confidence and encouragement."

 

[hkskyline]

Bloomberg article : Hong Kong Financial Secretary John Tsang rejected calls from lawmakers to review the city’s 29- year-old dollar peg amid rising concern asset prices are being driven to unsustainable levels by record-low borrowing costs.

Excerpt :
The peg “isn’t the main reason” behind the pickup in capital inflows as other Asian countries are experiencing similar surges, Tsang said today. His comments echoed those of the city’s monetary chief Norman Chan, who said Nov. 9 that talk of so-called hot money flowing into Hong Kong to speculate on the yuan is “unfounded.”

 

[hkskyline]

Economist who fathered current system says mainland currency can only replace greenback when it is fully convertible and widely used
South China Morning Post
Tuesday, 30 April, 2013, 4:48am

The peg to the US dollar has served Hong Kong for nearly 30 years, and replacing it with the yuan "could take many years"

The yuan will eventually be a feasible currency for Hong Kong to peg its dollar against, in place of the US dollar, said John Greenwood, known as the "father of the Hong Kong-dollar peg".

However, Greenwood said, the yuan must be fully convertible and widely used before that day comes, which could take "many years".

The chief economist at Invesco Asset Management defended the existing peg in a speech on "Optimising Hong Kong's Currency Strategy" to the Hong Kong General Chamber of Commerce.

There was no better currency that could replace the US dollar at present, said Greenwood, who has been a member of the currency board operations committee of the Hong Kong Monetary Authority since 1998.

When the yuan became a reserve currency and was widely held by local people and foreigners, then it could be an anchor currency for the Hong Kong dollar, he said.

But foreigners on the mainland were not even allowed to hold yuan deposits, he said.

"No country ruled by a communist party has ever permitted free capital flows," Greenwood told reporters.

No country ruled by a communist party has ever permitted free capital flows

The existing peg is being debated because quantitative easing by the United States brings inflation to Hong Kong.

Since the currencies are linked, low US dollar interest rates will inevitably be mirrored in the city, keeping the Hong Kong dollar low and leaving the city vulnerable to imported inflation from the mainland, since the yuan would strengthen relatively.

Discussing how to optimise the peg, Greenwood said the government had rolled out "macroprudential" tools, such as getting banks to reduce the growth of lending, which were supplementary to the system.

Domestic loan growth, nearly 30 per cent a year in 2009 and 2010, had fallen to a single-digit rate at present, he said.

Inflation would not go on rising with those macro measures in place, he said.

Raymond Yeung Yue-ting, a senior economist at ANZ Banking, said when the yuan became a currency that inspired wide confidence, as well as a global reserve currency, it could become an anchor for the Hong Kong dollar.

Hong Kong's currency peg was introduced in October 1983 on the advice of Greenwood and other economists. The HKMA, the city's de facto central bank, buys or sells Hong Kong dollars in the market to keep the local currency within a band of HK$7.75 to HK$7.85 to the US dollar.

With low US interest rates causing inflation and asset bubbles in Hong Kong, Joseph Yam Chi-kwong, the HKMA's former chief executive, published a paper in June last year saying it was time to review the peg.

Yam said Hong Kong needed "a continuous and vigorous intellectual exercise to consider whether the monetary system is serving the public interest".

"There is no doubt the [peg] has, for almost 30 years of its existence, been a pillar of stability for Hong Kong, but there are costs involved," he wrote.

"As with all jurisdictions operating with a fixed exchange rate, it is not possible for adjustments to economic shocks of all descriptions to work through the exchange rate."

 

[hkskyline]

Hong Kong loses an icon of finance with Lee Quo-wei's death
15 August 2013
South China Morning Post

An outpouring of tributes is to be expected after the death of a prominent figure with decades of distinguished service and contribution. Veteran banker Lee Quo-wei, who died last Saturday, aged 95, deserves the deepest respect for having played a pivotal role in shaping Hong Kong during one of its most difficult periods. His influence spanned banking and finance, education and politics. He has rightly been honoured as a great businessman and politician.

Born into an influential family in 1918, Lee started as a cable clerk in a local bank and worked his way up to the helm of the Hang Seng Bank, known for its customer service. He proved his worth in the 1960s when rumours led to repeated runs on the bank. Within three days, he rescued the institution with a buyout by the Hongkong and Shanghai Banking Corp. His prudent and pragmatic approach earned him the trust of the colonial government, and he was given the task of reforming the stock exchange after the 1987 market slump.

Lee was a pillar of the banking and financial sectors. As a banker and a non-official member of the Executive Council, he played a key role in introducing the US dollar peg in the 1980s. As former Monetary Authority chief Joseph Yam Chi-kwong said, Lee was his most respected senior in the financial sector.

His influence on politics and public affairs was no less significant. The former executive councillor and lawmaker was among the delegation that discussed Hong Kong's future with then paramount leader Deng Xiaoping . That he was appointed to the Education Commission, university bodies and various committees overseeing the city's transition underlines his contributions to Hong Kong's stability and development.

Lee may seem like a long-forgotten colonial figure. His strong sense of pragmatism, dedication and responsibility may appear alien in today's political landscape. But the footprints he left in the world of business, politics and education are indelible. As political heavyweight Allen Lee Peng-fei said, Lee should be remembered as an iconic figure.

 

[hkskyline]

HK dollar should link to basket, says Stiglitz
Nobel laureate says move will safeguard city as trading hub while other units gain dominance
19 November 2013
South China Morning Post

Hong Kong should consider pegging the Hong Kong dollar to a wider basket of currencies to better safeguard its status as a trading hub, says Nobel laureate Joseph Stiglitz, who also advocates a new global reserve currency to replace the US dollar.

While Hong Kong had been "remarkably successful in maintaining the currency peg for 30 years", the growing dominance of the yuan and other regional currencies could be "problematic" for the city, the former World Bank chief economist said at a talk on the global financial crisis at the Chinese University of Hong Kong yesterday.

"At the moment, the US dollar is going down, which strengthens Hong Kong's exports." But what if the dollar rebounded, he asked.

Stiglitz, who in 2009 chaired a United Nations commission on the feasibility of establishing a global reserve currency, also questioned China's persistence with buying United States debt, why it wanted to hold "a wasting asset yielding negative interest rates". A global reserve currency might help alleviate some of these issues but despite strong support from China, Russia and France, the ideas proposed by his committee were shot down by the US, he said.

A long-term critic of self-regulation and unfettered markets, Stiglitz dismissed many of the more popular free-market theories as "ideologically driven" and subsequently discredited by the 2008 financial crisis.

In his writings, he has been especially critical of what he calls "asymmetric globalisation" and "excessive financialisation", whereby governments compete in a race to the bottom to offer tax rebates and loose labour laws to global corporates while those same firms reward top executives with ever-higher pay packages.

Shareholders should have a greater say on corporate pay, Stiglitz said, adding that in the US the pay difference between a chief executive and an average worker was 250:1.

Instead, he advocates a more robust interventionist approach. "You need a market economy but with rules."

During a visit in 2011, Stiglitz lent his weight to the establishment of a minimum wage in Hong Kong, calling it an "important part of making a market economy work well".

Seen in the US as politically left, Stiglitz's opposition to the austerity-focused policies of Western governments has been driven by his preference for a Keynesian approach of stimulating demand to kick-start recovery. Instead, governments have cut spending and embarked on monetary support by slashing interest rates and buying bonds.

Stiglitz said the one positive to come out of the crash had been a resurgence in new economic theories and "less hubris", with the hope that new ideas would lead to better policies.

 

[hkskyline]

HKMA intervenes as deals, China optimism spur Hong Kong dollar gains

HONG KONG, July 2 (Reuters) - Hong Kong intervened to defend its currency peg for the first time in nearly two years as investor expectations for a rebound in Chinese equities boosted the local dollar.

More capital market activity from new listings and mergers and acquisitions also triggered unusual strength in the Hong Kong dollar, which tested the strong end of its trading band, prompting the monetary authority to step in from Tuesday.

The Hong Kong Monetary Authority (HKMA) bought a total of $2.1 billion in the past two days to restrain gains in the local currency, which is pegged to the U.S. dollar. That was the first time it did so since the fourth quarter of 2012, according to Thomson Reuters data.

Strength in the currency was not seen to be triggered by speculation over a revaluation of the peg, but rather signalled cautious optimism over the outlook for Chinese equities and the completion of recent capital market deals, traders said.

"If markets were expecting a peg move, we would have seen wholesale buying of the local dollar across the board on cash and forwards and given the current situation that is unlikely the case," said the head of currency trading at a big Chinese bank in Hong Kong, referring to the big political protests on Tuesday.

The Hong Kong dollar is pegged at 7.8 to the U.S. dollar, but can trade between 7.75 and 7.85. Under the currency peg, the HKMA is obliged to intervene when the Hong Kong dollar hits 7.75 or 7.85 to keep the band intact.

The HKMA, the territory's de-facto central bank, said the recent strength of the Hong Kong dollar reflected "increased corporate demand due to commercial activities, including merger and acquisition activities and dividend distribution."

Turnover is brisk. Daily trading volumes in the Hong Kong dollar are a few hundred times the average volume over the last one month, Thomson Reuters data show, and at odds with other currencies where volumes have are more subdued.

STRENGTH SEEN SHORT-LIVED

Traders say the Hong Kong dollar's rise is in lockstep with its decline in the forwards market indicating the local dollar's strength is of a short-term nature and arising out of the short-term financing needs from banks and companies.

As the Hong Kong dollar hit the strong end of the currency trading band, the forwards market was pricing in near-term weakness in the local currency with 1-month, 6-month, and 12-month forwards declining in value.

FX options where many hedge funds typically bet on the direction of the currency were also lacklustre, a sign that local dollar strength was short-term in nature.

One-month USD/HKD 25-delta risk reversals, which indicate the extent of the bets on the local dollar, has been steady for a while implied volatility subdued

That trend is line with other Asian currencies such as the Korean won and Taiwan dollar where authorities have intervened sporadically because of a soft dollar.

Meanwhile, investors are returning to the equities market and underpinning the Hong Kong dollar. The local stock index has turned conclusively positive for the first time this year.

Primary market activity has also picked up. June was the second-highest month for IPOs in Hong Kong this year at $3.2 billion, according to Thomson Reuters data.

Oversea-Chinese Banking Corp Ltd (OCBC) said all the pre-conditions to an agreement to buy Hong Kong's Wing Hang Bank Ltd had been satisfied, as various regulators had given their blessing to the $4.95 billion deal.

 

[teddybear]

This is a good thread. If the issue with Hong Kong currency come again, does this mean that another crisis by hedge funds hitting Hong Kong and Asia will happen in the future?

Hopefully not... but the US seems wanting to shake China's economy...

 

[hkskyline]

No. This time it is the HKD appreciating because of excessive demand, so the local monetary authority had to step in to lower the exchange rate.