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Discussion Starter · #1 ·
Sunday May 15, 10:53 AM
Hong Kong ponders way to ease market speculation fueled by the Chinese yuan

As speculation about a possible revaluation of the Chinese yuan continues to roil Hong Kong's markets, financial authorities here are taking a new look at their options for calming the waters.

Market speculation on a rise in the yuan has drawn lots of money into Hong Kong, whose open markets are a favored way for traders and investors to gain exposure to China. Because of the way Hong Kong's own peg to the U.S. dollar works, that influx of funds has pushed down interest rates to unusually low levels, and kept them there.

Such a loose monetary policy, at a time when inflation is returning and property prices are looking frothy, has officials worried.

Joseph Yam, chief executive of the Hong Kong Monetary Authority, said last week he is considering whether to "do something" to "rationalize" the market, and make Hong Kong interest rates return to their historical pattern.

Local interbank rates are now more than a full percentage point below comparable U.S. rates, though traditionally Hong Kong rates have been slightly higher than in the U.S.

Market watchers believe the Hong Kong Monetary Authority's most likely course is to soak up liquidity by selling more bonds, thereby locking up banks' short-term funds in longer-term instruments. The technique is known as "sterilization" in central bankers' jargon, and it is also practiced by other jurisdictions that maintain fixed currencies, including mainland China.

If this monetary-policy tool is indeed adopted by Hong Kong, it would be the first major change to how the 21-year-old currency board system operates since a series of technical adjustments were made following the Asian financial crisis of 1997-98.

While current market conditions may not be extreme enough for the Hong Kong Monetary Authority to step in, analysts say the turmoil that is likely to follow an actual yuan revaluation could demand a response.

Yam's boss, Financial Secretary Henry Tang, said last week the government is looking at "contingency plans" in case China does in fact make a change to its currency regime.

Philip Lau, treasurer for CITIC Ka Wah Bank, said, "If there are massive inflows to Hong Kong, then probably the HKMA should do something at that time to jack up interest rates and contain inflation."

Even a small action would send a strong signal to the markets, he said. "I think it would have a psychological impact much greater than the actual amount involved," he added.

Since officials say Hong Kong won't change its own peg, a yuan revaluation could stoke inflation by pushing up the price of Chinese goods. And if, as many deem likely, a yuan move sparks massive buying of China-related assets, the resulting fund flows could further push down Hong Kong interbank interest rates.

Joe Lo, an economist at Citigroup, said that sterilization would be a good option.

"Sterilization is very commonly used by other central banks," he said. "It is almost risk free. The HKMA can issue notes to absorb the excess liquidity and invest the money it raises in U.S. Treasurys, for example, and pocket the difference in yield."

Yet many traders think there could be some difficulties if the HKMA chooses the sterilization option.

The biggest hurdle would be convincing reluctant banks to buy the additional paper. That's because banks may not be willing to switch those short-term funds into longer term instruments, as they could be caught short if speculative funds pull out. Traders argue banks probably would have already invested those funds elsewhere if the money was really expected to stay in Hong Kong for the long term.

And the HKMA also may not want to risk exposing itself to a reverse in market sentiment.

To avoid those pitfalls, the HKMA may have to keep the actual size of any sterilization operation rather limited, and rely more on the psychological impact of its actions. By sending signals to the market now, it can also influence traders' thinking before deciding whether to make a move.

"The idea that the authorities are going to have to come in ... will have an impact on speculative interest in the Hong Kong dollar," said Tim Condon, an economist at ING in Singapore. "I think traders do look at that as a signal on how to position."

Andrew Batson is a correspondent for Dow Jones Newswires.
 

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Discussion Starter · #2 ·
Hong Kong Loosens Its Dollar's 22-Year Peg
Thursday May 19, 1:17 am ET
By Min Lee, Associated Press Writer

Hong Kong's Top Central Banker Says Currency Exchange Cap Won't Lead to Major Rate Hikes

HONG KONG (AP) -- Hong Kong's top central banker said Thursday a decision to loosen the Hong Kong dollar's 22-year peg to the U.S. dollar won't prompt banks to raise interest rates sharply and hurt businesses.

The Hong Kong Monetary Authority announced Wednesday it will set up a trading band on the Hong Kong dollar, with a floor of HK$7.85 to US$1 and a ceiling of HK$7.75. Previously, Hong Kong's currency board system only prevented the local currency from dropping below HK$7.80 to US$1.

Joseph Yam, the authority's head, said the move was aimed at discouraging buying of the Hong Kong dollar on speculation that China would allow its currency, the yuan, to appreciate.

The influx of funds has kept local interest rates below U.S. rates -- a historical anomaly because Hong Kong typically follows U.S. monetary policy due to the currency peg, introduced in 1983. The trend could cause inflationary pressure in the long run, Yam warned.

But Yam said Thursday he doesn't expect local banks to raise rates significantly.

"Everyone doesn't have to be worried because although there is an interest rate discrepancy (between Hong Kong and the U.S.), it's not too big. So if banks raise savings and prime rates, they won't raise them too significantly," he told reporters.

The Hong Kong Economic Journal, a respected financial newspaper, expressed fears about higher rates Thursday, saying in an editorial that "Hong Kong needs to pay the price" for the cap on the currency peg.

"Everyone knows a sudden hike in interest rates will deal a blow to all sectors," the paper said.

Hong Kong's intervention appeared to bear fruit initially. The Hong Kong dollar immediately dropped below its peg rate of 7.80 to the U.S. dollar after the announcement, forcing the central bank to buy HK$3.12 billion (US$400 million; euro316 million) from banks -- a sign that funds have already started leaving Hong Kong.

Analysts also said Hong Kong's intervention may lead to selling of other Asian currencies and higher interest rates in their countries.

Most east Asian currencies, including those of Taiwan, Singapore, South Korea and Japan, have been lifted by positioning for China's possible decision to let the yuan appreciate.
 

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HONG KONG TO KEEP CURRENCY PEG WITH US DOLLAR: SECRETARY

HONG KONG, July 22 Asia Pulse - Hong Kong acting financial secretary said Thursday that Hong Kong will keep its currency peg with the US dollar.

"The government has no intention at all to change the Linked Exchange Rate system, which has served Hong Kong well for more than 21 years and has been the anchor of our economic stability," Stephen Ip, Secretary for Economic Development and Labour in Hong Kong, said in a statement.

He also welcomed the latest reform of the renminbi (Chinese currency) exchange rate regime, in response to the announcement made by the People's Bank of China Thursday evening.

"Hong Kong's financial and monetary systems are well established and well prepared for changes of this kind," said Stephen Ip.

According to him, the reform of the renminbi regime is also likely to benefit the economy of Hong Kong.

These benefits include greater competitiveness in Hong Kong's exports to the Chinese mainland and the stability brought by more sustainable economic development of the mainland, he said.

A stronger renminbi will also raise the purchasing power of mainland consumers and this is likely to benefit Hong Kong's exports to the mainland. Hong Kong's inbound tourism will also benefit as more mainland visitors come and spend in Hong Kong, he added.

According to Joseph Yam, chief executive of the Hong Kong Monetary Authority, the recent refinements introduced to the Linked Exchange Rate system have strengthened its ability to deliver monetary stability in Hong Kong and to handle the impact of capital flows arising from changes to the renminbi exchange rate regime.

"The financial market in Hong Kong is not volatile," he added.
 

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Yuan-dollar peg must wait: Tsang
26 May 2006
South China Morning Post

Hong Kong would not consider pegging the dollar to the yuan until it became fully convertible, Chief Executive Donald Tsang Yam-kuen said yesterday.

He said there was no plan to delink from the US currency.

"We are very comfortable with the link to the US dollar {hellip} We don't have internal or external pressure to change it," Mr Tsang said.

The chief executive was responding to suggestions the local currency be pegged to the renminbi instead of the US dollar, a move that analysts say would benefit the city amid increasing ties with the mainland economy.

Mr Tsang stopped short of ruling out such a possibility but stressed the importance of full convertibility of the yuan before Hong Kong would even consider such a change.

"The first criteria [needed] to contemplate linkage is the full convertibility," he said, noting the Hong Kong dollar and the yen were the only two Asian currencies that were fully convertible.

But how quickly China was moving towards it was anyone's guess, he said.

Mr Tsang said it was too early to say whether the government should revise the annual economic growth estimate in light of 8.2 per cent growth in the first quarter.

"We are still in early days as far as 2006 is concerned {hellip} All in all, we are very robust and doing quite well in terms of trade, tourism, in fact across the board," he said.

On the 11th Five-Year Plan set out by the central government, in which Hong Kong is included for the first time, Mr Tsang said the city should discuss the challenges and opportunities that might arise.

He said sporadic discussions by different sectors in the past had not been fruitful.

"I believe it would be better if I can assemble the best brains in Hong Kong for an economic summit," he said.

He said the summit, which will be held before September, would be limited to a dozen or so members of the elite with international and mainland exposure.

The economic development of China was a mammoth issue that also was affecting the rest of the world.

"Definitely there will be an impact on us. For that reason, we are in the best position to tap that. There will be new challenges with the mainland," he said.

On the growing concern over air pollution, Mr Tsang lamented that critics only focused on the issue of visibility.

He said people considered only the visibility angle. "Look across the harbour today. It's a fantastic view. It's very good, compares favourably to everybody else," he said.

"Of course we have bad days, particularly when northerly winds are blowing in the winter. So we have bad times, as do most other cities."

Mr Tsang expressed confidence of continued improvements in Guangdong under the 11th five-year plan.
 
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