Hong Kong officials are speaking out in defense of the territory’s U.S. dollar peg again, following a huge
month-on-month jump in yuan deposits in the city.
Speaking at a forum on Wednesday, Hong Kong Monetary Authority Chief Executive Norman Chan drove home the point by laying out four criteria he said would have to be met before Hong Kong would consider cutting loose from the U.S. dollar.
1. The yuan must be freely convertible.
2. China’s capital account should be liberalized.
3. China’s financial market needs to be more mature.
4. Hong Kong’s economic cycle needs to be more closely aligned with China’s.
Mr. Chan illustrated his point with the example of the U.K. as a country that can be awash in a foreign currency without yielding to it. He says the amount of foreign currency deposits there exceeds the amount in British pounds, but the pound remains dominant.
Mr. Chan might find a better example closer to home. In the very long run, Goldman Sachs writes in a note, Hong Kong could run a dual currency system akin to Macau’s, where the pataca is legal tender but the Hong Kong dollar’s share of M1 – the sum total of all money in circulation, including bank demand deposits and travelers checks – is almost equal to the local currency’s. For investment, the Hong Kong dollar is actually used more widely than the pataca, 53.6% to 28.2%.
Standard Chartered adds some historical context in support of Mr. Chan:
“Historically, the adoption of a foreign currency as a means of exchange has generally happened in the context of hyperinflation (typically leading to the substitution of the USD for the domestic currency). There simply is not enough prospective volatility in the HKD valuations versus the CNY or actual goods and services to threaten the HKD’s role as legal tender (which, in any case, is enshrined in the Basic Law).”
And the Basic Law doesn’t officially expire until 2047.