Joseph Yam: Please Abandon the Currency Peg

… or peg HKD with CNY.

This morning, the Hong Kong Monetary Authority Chief Joseph Yam spoke in the radio, reiterating that he will not abandon the currency peg, and cited that the cause of inflation is the rising wage is the most important cause of inflation in Hong Kong (for a more thorough discussion, please see the Viewpoint weekly column by Joseph Yam).

Abandoning the peg is not only about inflation. As I have written at the much earlier, currency peg of HKD with USD makes Hong Kong lack of autonomy in setting our monetary policy. It was the reason why our economy recovered so slowly after the Asian Financial Crisis in 2007. USD at that time was strong, and interest rate was rising. In order to keep the peg, the interest rate in Hong Kong has to be risen too. Also, at the time when our currency peg was under speculative attack, the Hong Kong Monetary Authority has to rise the overnight rate in order to maintain the currency peg. At that time, we were talking about hundreds of percentage points of overnight rate.

And it is the reason why I call for abandoning the currency peg. It is not just about inflation; it is more about bubble. Yes, the labour cost is perhaps the most important component in driving inflation in Hong Kong. But what matter even more is overheating the economy, and asset price bubbles. We are now having negative real interest rate. The interest rate in deposit account only generate a few HKD for HKD10,000 of deposit. The cost of borrowing in Hong Kong is so low now, such that we are at risk of asset price bubble like we had in 1997. If the bubble keep growing bigger non-stop, there is no problem. However, if the price stop rising, and actually dropped, the consequence is very serious.

Take real estate for example. Before 1997, the house prices rose so much that holding a home for 1 year probably give you a double digit percentage point of return. There were many cases that one buy a flat for 5m, and next week, he sold it with a return of 200k, without really paying much except the deposit. Many people engaged in real estate speculations, buying 10 or 20 flats in a newly built real estate, hoping to sell them in a very short period of time with a profit at the time which he or she probably has not pay the down payment and start the mortgage payment.

As the Asian Financial crisis unfolded, the house prices dropped dramatically. I vividly remember that my father bought a flat at the height of 1997 bubble. When he sold the flat in 2004, the price was less than a half of the price he paid (and actually, the price has risen a bit from the bottom in 2003)! Yes, most of the real estate prices dropped more than half of the value in few years after 1997. We are probably talking about 10 to 20% drop of house prices in US now, but in Hong Kong, it was more than a half. Why did this happen? Because of the faulty monetary policy (and fiscal policy, of course!), the Hong Kong government and the Monetary Authority stimulate the already heated economy. But when the economy is weak, they tighten the policy to fight for the currency peg.

Here, I call for a complete review of the currency peg system of HKD with USD. The mandate of the Hong Kong Monetary Authority should not be limited to maintain exchange rate stability, but be a active monetary policymaker of Hong Kong, to regulate financial services, banks, to promote price stability, stable economy, and sustainable economic growth.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.