Hong Kong dollar peg will hobble on
Despite fears Hong Kong's economy may be overheating, the HK dollar isn't about to ditch its peg to the US dollar. Here's why.
For the past 28 years, Hong Kong has pegged its currency, the Honk Kong dollar, to its US counterpart. One greenback buys around 7.8 HK dollars. That means Hong Kong imports its monetary policy from America. But while the US Fed's current near-zero interest-rate policy might suit the weak US economy, the worry is that Hong Kong may be overheating. The property market is red hot and inflation is at a 16-year high of almost 8%. But, because of the peg, Hong Kong can't let its currency rise to temper inflation. So some observers are betting that the peg is unsustainable and will be abandoned so the city state can curb inflation and property prices.
Don't count on it, says The Economist. For starters, a flexible exchange rate doesn't necessarily bring stability. Both growth and inflation swung wildly in 1974-1983, when the currency floated freely. Moreover, the exchange rate may be fixed, but Hong Kong's wages and prices "are famously flexible in both directions". So the economy can adjust to the dollar's ups and downs without changing the peg. For instance, consumer prices fell between 1998 and 2004, a period of deflation that was shorter but deeper than Japan's. In other words, the peg is less of a constraint than it looks.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Lifetime ISA reform: Retirement option could be scrapped in overhaulA consultation on a product replacing the Lifetime ISA is set to be launched this year, and the option to use it to save for retirement is expected to be axed in the shake-up
-
HMRC stamp duty crackdown sees probes of property deals jump 88% – what to watch out forFrom bogus stamp duty refund claims to misleading the taxman about who owns a property, HMRC is increasing its scrutiny of stamp duty land tax reporting. Here’s how.
