HONG KONG – The architect of the Hong Kong dollar peg said the currency’s resilience over the past six months amid anti-government protests justifies the merits of the exchange rate system and expects it to that it lasts for many years to come.
The so-called linked exchange rate system, in which the local currency is pegged to the US dollar, has incorporated corrective measures to counter capital outflows, as the tightening of the market and a corresponding increase in interest rates immediately attracts capital outflows. short-term flow, John Greenwood, chief economist at fund manager Invesco and the person who proposed the system in 1983, said at a press conference in Hong Kong.
“The Hong Kong dollar linked exchange rate system is one of the strongest fixed exchange rate mechanisms in the world,” Greenwood said. “It’s like the gold standard or the silver standard. The Hong Kong system has already lasted 36 years and it can last another 36 years.”
The anchor held firm despite concerns about capital outflows and betting from traders, such as Kyle Bass of Hayman Capital Management and Kevin Smith of Crescat Capital, that the unrest would cause capital flight, push rates up. interest and lead to the disappearance of monetary policy. . The Hong Kong Monetary Authority and the government have reaffirmed that the anchor is here to stay.
Anchoring has become a widely debated topic in times of economic stress, with many fund managers betting on its demise over the years, only to back down. Hedge fund manager Crispin Odey bet against the peg for more than two years before giving up in 2018. Investor and philanthropist George Soros tried and failed to break the peg during the Asian financial crisis in 1998, while hedge fund manager Bill Ackman bet on an appreciation of the Hong Kong dollar in 2011 also suffered a similar fate.
“Some long-term capital is gone, but that is thwarted by shorter-term capital inflows because the interest rates are higher,” Greenwood said. “On the overall balance of payments, we know that the Hong Kong Monetary Authority did not intervene and therefore there is no net outflow or net reduction based on the overall balance of payments. “
The peg was introduced in 1983 to stop a rapid fall in the then-floating currency, as the UK, which then ruled the territory, discussed the city’s future with China. It is backed by foreign exchange reserves held in a currency board managed by the HKMA, which acts de facto as the city’s central bank but does not deal with monetary policy.
The HKMA has a mandate to buy Hong Kong dollars for US dollars when cash outflows push the exchange rate to the lower limit of the trading band of HK $ 7.85 per US dollar. The HKMA last intervened to support the currency in April. Since then, the currency has only strengthened, although anti-government protests have grown increasingly violent.
From a low of HK $ 7.84 per US dollar in August, it strengthened to 7.79 at the end of 2019 and is currently trading at 7.77.
Another data point, which the HKMA uses to show the strength of the anchor, is the overall stable balance, which is the balance of clearing accounts maintained by banks with the HKMA to settle interbank payments and payments between. banks and monetary authority.
“The HKMA has not been called upon to buy Hong Kong dollars from the weak side convertibility firm since April of this year, and the overall balance has held steady at around HK $ 54 billion since then. “said Howard Lee, deputy managing director of the monetary branch. authority, said in a statement Dec. 30.
Greenwood said Hong Kong would not be able to peg to the Chinese yuan, as the currency is not freely convertible, and it was also not possible to switch to the Japanese yen or the British pound given that the US dollar dominates capital flows in Asia.
He said he was convinced that pegging to the greenback “will continue to be the best solution for Hong Kong”.