Outlook for the New Year
Global economic and financial uncertainties continue to affect Hong Kong. There need, however, be no doubt about the continuing stability of the Hong Kong dollar under the Linked Exchange Rate system.
As we step into the year 2002, let me first wish readers of this column a very Happy New Year. Although, by the look of things as they now stand, and to be realistic, it is unlikely to be a prosperous year, I hope readers will nevertheless find reasons to be happy. In case issues surrounding our currency are determinants of whether you can be in that state of mind, let me assure you that we in the HKMA will continue to do our utmost to promote a stable and predictable monetary environment to help you to plan your financial affairs.
Our currency will remain stable. Never mind Argentina and all that is said about the worsening crisis there. Argentina is thousands of miles from Hong Kong. The trade and other economic links between Hong Kong and Argentina are minimal. The only similarity is that Argentina also runs a currency board system. But there is absolutely no reason why the escalating problems in Argentina should affect Hong Kong. Argentina’s problems stem from its large external debt and its inability to cope with the strict fiscal and other economic disciplines imposed on it through fixing the exchange rate. Hong Kong has no official external debt and we have an outstanding record of fiscal discipline, although the Asian financial turmoil and more recently the world recession have caused Hong Kong to run a sizeable fiscal deficit. Argentina has a dearth of foreign reserves. Hong Kong has the fourth largest reserve assets in the world and the second largest in per capita terms. But, in the coming year, you will continue to hear, for as long as the crisis in Argentina lingers on, of the possibility of market contagion, under the influence of globalisation, and of advice from investment houses that you should hedge your Hong Kong dollar assets.
You will also hear references to the destabilising effects, particularly in the region, of continued weakness of the yen, possibly leading to another round of competitive devaluation of Asian currencies, and the implications of this for the Hong Kong dollar. Again, this ignores the fact that many economies in the region that have devalued their currencies in the financial crisis of 1997-98 are not coping as well as Hong Kong, with our stable currency. In this context, there will be the popular predictions again for the weak yen to lead to a devaluation of the RMB, thus putting pressure on the Hong Kong dollar, notwithstanding the fact that the Mainland is still running a substantial balance of payments surplus. And so on. You will hear the advice that it is cheap to hedge, although it never is, when you actually come around to doing it; and when hedging gets to be so obviously expensive there will be the further advice that the high price indicates precisely the urgent necessity to hedge.
In the, I hope unlikely, event that any of you are, for one reason or another, confronted with such advice, let me offer you an alternative one at no fee. Calm yourselves down. You will find, as has been the case for over eighteen years, that our currency will remain stable, against the US dollar, at the fixed exchange rate of 7.80. And if you wish to remind yourselves about why we have been so persistent, or stubborn, in pursuing this exchange rate policy, click into our website and read the many research articles, papers and speeches on the subject. There is, of course, the long-standing but healthy difference of opinion about whether the linked exchange rate system is in the best interest of Hong Kong. We in the HKMA, and the great majority of the people of Hong Kong, are firmly of the view that it is; but there are inevitably those who, for respectable reasons, think otherwise. Let this healthy debate continue, if only for the simple reason that a general understanding of how the system works, and of what realistically are the choices open to us, will be increased in the process.
Greater understanding further enhances the credibility of and confidence in the system. If so, this will be reflected in the interest rate premium, if any, for the Hong Kong dollar over the US dollar continuing to be small and possibly insignificant, as was the case in the past couple of years. With US dollar interest rates, and correspondingly Hong Kong dollar interest rates, likely to remain low this year, the monetary policy stance we import from the US should help us to position ourselves well for the economic recovery that will come, hopefully sooner rather than later.
Joseph Yam
3 January 2002
More information on the Linked Exchange Rate system can be found here.
Related Publication:
ANSWERS TO THE CHRISTMAS QUIZ 2001
Click here for previous articles in this column.
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