Hong Kong in no rush to switch dollar peg

Pity the Hong Kong authorities. No one is quite as trapped between the conflicting forces of China's slowdown and the expected US interest rate rise as a territory with its future tied to China and its currency pegged to the US dollar.

Add in surging demand for Hong Kong dollars triggered by record turnover in the city's stock market and inevitably questions arise about the suitability, and the sustainability, of the tight 32-year-old currency peg. Last week the Hong Kong Monetary Authority intervened in the markets to maintain the peg for the first time since last August. On Wednesday, Norman Chan, HKMA chief executive, said the stock market rally produced $4.4bn of inflows last week. By comparison, the HKMA spent about $1.3bn in total last August on its market actions.

The case against a dollar peg is growing. It is not hard to argue that easy US monetary policy has produced bubbles in Hong Kong, most notably in property. Overall, the ratio of credit to gross domestic product has roughly doubled since the Federal Reserve's quantitative easing began.

Trade links between Hong Kong and the US are falling as China rises, too. The US now accounts for 5 per cent of Hong Kong's business, down from 20 per cent when the peg was introduced, according to BNY Mellon. China, meanwhile accounts for a full quarter, up from 15 per cent.

More prosaically, traders point out that if the Swiss can shock the market by abruptly removing their currency cap as they did in January, why might not Hong Kong suddenly announce it will peg instead to the renminbi?

But a peg shift seems unlikely for now, not least because there are not in fact enough renminbi outside China to replace the HKMA's $332bn in reserves.

The more general argument is simpler - if it ain't broke, don't expect it to be fixed soon. A peg that has weathered the handover of Hong Kong to China, the Asian financial crisis, Sars and the global financial crisis has market credibility that Hong Kong should be loath to lose.

The HKMA warned last month about the risk of rising volatility in Hong Kong - and it was right. With China still slowing and US rate expectations at the mercy of each new piece of economic data, more swings can be expected as well as more talk about the dollar peg. But actual change is less likely.

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