Can you imagine the Hong Kong banknotes you use when shopping in the supermarket being replaced by renminbi one day?
For now, this kind of talk is taboo among senior Hong Kong officials.
Norman Chan, chief executive of the Hong Kong Monetary Authority (HKMA), and former Financial Secretary Antony Leung have re-emphasized that the current peg to the US dollar is the most suitable arrangement at present.
Advocates of the peg will not easily let go, saying it has helped maintain stability in the financial system through three recessions in the United States, an attack by George Soros during the 1997 Asian financial crisis and economic hardship during SARS.
But is it something that should never be changed?
The Hong Kong dollar was pegged to silver and the British pound in the past century. It was linked to the US dollar twice during 1972-83.
In fact, the Hong Kong dollar has been changing to adapt to varying economic situations.
It is interesting to note that Peter Wong, vice president and chief executive of HSBC, thinks that Hong Kong should rethink the peg.
Two weeks ago, he suggested provocative ideas on the peg issue, including replacing the Hong Kong dollar with renminbi. The comment echoed former HKMA chief Joseph Yam who said it’s time to unpeg the Hong Kong currency.
The issue is topical amid increased efforts by China to globalize the renminbi.
This week, HKMA relaxed the renminbi daily exchange limit of 20,000 yuan in Hong Kong. Next Monday, the Shanghai-Hong Kong Stock Connect program will be launched.
The impact of these developments is the potential marginalization of the Hong Kong dollar as the renminbi becomes more popular in the long term.
Eventually, when the renminbi is fully convertible and its internationalization process completed, would the Hong Kong dollar still have a role to play?
The currency peg is not set in stone and Hong Kong’s currency regime has been changing with time.
The fact is the basic fundamentals that led to the peg in 1983 have totally changed. This is a very different world than the one 31 years ago.
To know what those differences are exactly, we have to understand why the peg came about in the first place.
In 1983, large capital outflows due to Sino-British negotiations on the handover and uncertainty about Hong Kong’s future after 1997 were the key trigger of the peg.
Also, Hong Kong had a close economic and trading relationship with the US, making the greenback an obvious target for the peg, instead of other major currencies such as the British pound.
Undoubtedly, the peg has helped Hong Kong become the premier international capital market in Asia, but things have changed after all these years.
Hong Kong is now a much bigger and more stable economy and its largest trading partner today is China.
So, the two key reasons behind the peg are no longer valid.
A currency has two main functions. One is for transactions, the other investment. In both areas, the renminbi is gaining importance in Hong Kong.
As an investment tool, it has gained popularity. Cross-border stock trading will probably bring it to the next level when the program starts next week.
For the time being, the Hong Kong dollar will remain a major transaction currency while the renminbi continues to gain acceptance in more markets.
Most merchants in tourist areas are more than happy to use the renminbi as a medium of exchange.
The Basic Law specifies that the Hong Kong dollar will be Hong Kong’s currency until 2047 but given the reasons above, we should now give serious thought to whether the “one country, two currency’ system should carry on.
Should the peg be maintained? If there is need to peg the Hong Kong dollar to a major currency, should it be linked to the renminbi instead? Or do we need to keep the Hong Kong dollar at all?
What do Chinese officials think of the issue? Guess what, they are quite open to it.
In fact, Zhu Jun, deputy director of the international department of the People’s Bank of China, the country’s central bank, said just that in July but it was not covered by most of Hong Kong media.
He said the PBOC would respect Hong Kong’s decision whether to continue the peg. However, there is no way to stop the renminbi becoming more preeminent in the future, indicating it’s wise to give a thought to the issue.
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