Hong Kong to review dollar peg

Featured - June 13th, 2012
thumb

Joseph Yam, former head of the Hong Kong Monetary Authority, has urged Hong Kong to review its dollar peg and consider the Chinese renminbi as the city’s economy becomes integrated with that of the Chinese mainland.

In the three decades the city has been using the dollar peg, it has minimized foreign exchange volatility and encouraged international trade and investment. Yam suggested to the Financial Times that gradually replacing the dollar with the renminbi could pave the way for a flexible exchange rate. Yam also says that the move will showcase China’s increasing dominance in Asia.

Hong Kong authorities are extremely reluctant to change the peg. Incoming Hong Kong chief executive argued “the peg has served well to stabilise the financial market and the economy in our small and open economy… there is no need to change the current peg in any way”.

While the dollar peg saw a surging inflation and property prices, and volatility between of $7.75 and $7.85 on Tuesday, traders told a reporter that the renminbi is not likely to replace the US dollar in Hong Kong’s currency board system, as the currency is still not fully convertible.

Yam told the Financial Times that Hong Kong should still consider efforts to develop financial infrastructure to support the use of foreign currencies.