- Hong Kong should review its US dollar peg and consider linking its currency to the renminbi
- View from Joseph Yam, the former head of Hong Kong's de facto central bank for 16 years
- Yam: Makes sense as Hong Kong's economy has become more integrated with mainland
Hong Kong should review its US dollar peg and consider linking its currency to the renminbi, according to Joseph Yam, former head of the Hong Kong Monetary Authority.
Mr Yam, who ran Hong Kong's de facto central bank for 16 years until 2009, is the most influential person to suggest such a move. He also said the Chinese territory should consider adopting a flexible exchange rate regime.
Ending the US dollar peg after nearly three decades would be hugely symbolic as a sign of China's increasing economic dominance in Asia.
"Nothing is absolute or sacrosanct," said Mr Yam, who waged war against George Soros in 1998 to protect the Hong Kong peg during the Asian financial crisis.
Mr Yam suggested that gradually replacing the dollar peg with greater reliance on the renminbi made sense as Hong Kong's economy has become increasingly integrated with that of the Chinese mainland.
Pegging its currency to the greenback has allowed Hong Kong to minimise foreign exchange volatility and has encouraged international trade and investment.
The Hong Kong establishment and financial community remain reluctant to change a system which they argue has served the city's economy well for nearly three decades.
But by forcing Hong Kong to import monetary policy from the US, the peg has in recent years contributed to soaring inflation and property prices.
In releasing a paper on the currency system on Tuesday, Mr Yam said the HKMA's focus on maintaining the peg could be considered an "obsession or even paranoid".
Mr Yam, 64, said his intention was simply to stimulate debate, but his position sparked an immediate response from the government.
"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," said Leung Chun-ying, incoming Hong Kong chief executive.
Mr Yam, who advises the mainland Chinese central bank, said that if Hong Kong maintained a peg, the question was whether, over time, the anchor should be the renminbi rather than the US dollar.
As a currency that is not yet fully convertible, the Chinese renminbi cannot replace the US dollar in Hong Kong's currency board system yet. Mr Yam said this could change over time as China removes its restrictions on cross-border currency flows. He added that even under current rules, the value of the Hong Kong dollar could be linked to a basket of currencies including the renminbi.
The Hong Kong dollar was unusually volatile within its narrow trading band of between $7.75 and $7.85 on Tuesday, but traders said almost no one expected Hong Kong to abandon the peg any time soon.
"The peg is here to stay, with no appealing alternative," said Frances Cheung of Crédit Agricole.
Mr Yam was an HKMA employee in 1983 when the then British colony adopted a currency board mechanism to put an end to destabilising currency volatility.
Whatever happened to the peg, said Mr Yam, Hong Kong should continue to develop its financial infrastructure to support the use of foreign currencies. "Ultimately," he said, "the use of a particular currency to perform the basic functions of money -- as a medium of exchange, a store of wealth and a unit of accounting -- is a matter of choice for the users."