Hong Kong dollar peg here to stay despite global shifts, currency architect Greenwood says The Hong Kong dollar’s peg to the US dollar will not change despite recent volatility and a “mild erosion” of the US dollar’s dominance, according to John Greenwood, the economist behind the city’s currency mechanism. Hong Kong’s currency board system acted “as designed” during a tumultuous year for the local dollar, Greenwood said on Tuesday during a briefing in the city. Earlier this year, a rare liquidity surge from the Hong Kong Monetary Authority’s (HKMA) defence of the currency peg sent Hong Kong interbank rates tumbling in May, causing a divergence in Hong Kong and US interest rates. That divergence triggered carry trades, where investors borrow in low-interest currencies to invest in higher-yielding assets, which pushed the Hong Kong dollar to the weak end of its peg and triggered the HKMA to intervene 12 times between June 25 and August 13. “Clearly, I think some people are having second thoughts about whether this is an appropriate system to have, whether we could have a more stable system,” said Greenwood, who was in town for the HKMA’s currency board committee meeting. “At the moment, the official view is that there is absolutely no intention to change anything.” Greenwood’s analysis of the options available formed the basis for Hong Kong’s currency peg in 1983, which was introduced after the Hong Kong dollar slumped amid investor concern at the time over talks between Beijing and London on the return of the city to mainland rule. He said the linked currency system had weathered the ups and downs of the market for the past four decades. Hong Kong’s currency has been pegged to the US dollar at HK$7.80 since 1983, with a trading band of HK$7.75-HK$7.85 introduced in 2005. The peg to the US dollar was still the best option for Hong Kong as “the US is the dominant force in the global business cycle, so we’re better off pegging to the US dollar than to the renminbi [yuan]”. Greenwood added that he does not see the US dollar’s value and role as a global currency being drastically diminished. “What I see is a very mild erosion at the edges, but frankly, I think the dollar will still be the dominant currency for probably several more decades,” Greenwood said. He said neither the euro nor the yuan could replace the US dollar because Europe lacks a unified sovereign debt market, while China’s currency remains non-convertible and restricted for international investors. “I don’t think it’s sensible to peg to a non-convertible currency because the Hong Kong system fundamentally relies on a degree of arbitrage,” he said, referring to the trading strategy to move money from one currency to the other. If the Hong Kong dollar were pegged to the yuan, the city would have to hold yuan reserves, which could raise political issues, he added. Greenwood said Hong Kong serves as a useful buffer between China and the rest of then world, enabling major capital flows through its markets without directly impacting the mainland’s financial system. “Therefore, I don’t see any possibility or likelihood that the Hong Kong dollar would be shifted to the renminbi, at least in the near future.” When asked whether Hong Kong should adopt a currency basket like Singapore’s, Greenwood said such systems were managed and opaque, unlike Hong Kong’s transparent regime that allowed clear interest rate arbitrage. “In the 40 years that we’ve been operating, we’ve had all kinds of events,” he said, citing the global financial crisis, Sars, the social unrest and the pandemic. “The currency board mechanism has kept the Hong Kong dollar stable from a long-term perspective throughout that period. So I think that it has served Hong Kong well.” Asked about stablecoins and their implication on Hong Kong’s exchange rate system, Greenwood said stablecoins were a risky bridge from fiat money to volatile crypto assets, which were often used for “nefarious” purposes. He added that they lacked practical value, offered no interest to holders and lacked access to central bank facilities. “It would be much better, in my opinion, to focus on speeding up transactions in the banking system,” he said. “My advice has been to stay away from stablecoins.” https://www.scmp.com/business/banking-finance/article/3329834/hong-kong-dollar-peg-here-stay-despite-global-shifts-currency-architect-greenwood-says (ICE HONG KONG)

Fonte notizia: South China Morning Post