Assessments of the strengths or weaknesses of Hong Kong's monetary system should first pay attention to Hong Kong's external financial position.
I spend a lot of time reading analytical articles and comments about monetary and financial issues. Recently there has been quite a lot on our exchange rate link. I hope, of course, to understand alternative views on this subject in order to be better informed, and promote objectivity in what we say and what we do.
As I am sure is the case with my viewpoint articles, what I read varies in its ability to convince. On the subject of the exchange rate link, I still see a heavy dose of references to Argentina. While I accept the sound advice that the sustainability of a fixed exchange rate, even of the strong currency board category, is dependent upon sound policies, now that Argentina has been off its currency peg for some time, I really do not see anything in common between Argentina and Hong Kong. There is no other place on this globe that is farther away from Hong Kong. Try and imagine an axis from Hong Kong through the centre of the earth that comes out on the other side of the globe. That is how remote Argentina is geographically, and it is equally remote in terms of its present monetary and economic position.
The strength or weakness of a currency, or the robustness of a monetary system that holds a currency stable, depends on a host of factors. Among these, and of predominant importance, is the external financial position of an economy. I have referred to them before, but four points are worth reiterating, given that there is renewed interest in the Hong Kong dollar's link to the US dollar.
First, unlike the handful of emerging markets that have recently had problems on the currency front, the HKSARG has no external debt at all. It has external assets, in the form of foreign reserves held in the Exchange Fund of over US$110 billion - the fifth largest in the world and second largest in per capita terms. Hong Kong is also running a balance of payments current account surplus, which means that we are earning more foreign exchange from the goods and services we export than we pay for the goods and services that we import.
Secondly, the banking sector of Hong Kong is "long" in foreign currencies. In other words, it has more foreign currency assets than foreign currency liabilities. At the end of 2001, these amounted to US$440 billion and US$415 billion respectively. And the assets are in fairly liquid form, so that foreign currency liabilities can comfortably be met when they become due.
Thirdly, although the figures are probably less comprehensive, the non-bank private sector of Hong Kong is probably also significantly long in foreign currencies. Where there is external debt, much of this is incurred by large Hong Kong companies that have operations elsewhere and have developed access to the international market to achieve a diversification of their funding sources. They also have substantial foreign currency assets and are in a position to manage currency exposures. There is also the direct investment related inter-company lending to foreign companies operating in Hong Kong. They too are quite capable of managing their exposures to the Hong Kong dollar. For individuals, I believe that Hong Kong people have a relatively high proportion of their financial assets in foreign currencies when compared with the people of other jurisdictions, although not all of their future foreign currency obligations (for example children's education fees overseas), if any, have been covered.
Fourthly, for Hong Kong as a whole, therefore, we have external financial assets that far exceed external financial liabilities. This is indeed borne out by figures produced by the Census and Statistics Department. At the end of 2001, the net external financial assets of Hong Kong amounted to US$272 billion. This is equivalent to 166% of GDP for the year 2001. This is huge. It is the highest in the world. To put the number in context: the corresponding figure for Japan, the second highest among those compiling similar figures, (which is not a lot, but including all the G-7 countries and a handful of large and significant economies), is 35%.
This very healthy external financial position of Hong Kong should not be overlooked when taking a view about the inherent strength or weakness of the Hong Kong dollar.
Joseph Yam
17 October 2002
Related Viewpoint article:
Click here for previous articles in this column.
Document in Word format
