Hong Kong dismisses Yam’s suggestion to review linked exchange rate system

There is no need for the government to change the linked exchange rate system that has served Hong Kong well over the years.

Financial Secretary John Tsang said views expressed by Joseph Yam, former first Chief Executive of the HKMA, have been raised by different commentators over the years.

“They have also been thoroughly analysed by Monetary Authority colleagues when Mr Yam was still the Chief Executive of the Monetary Authority,” he noted.

A research report written by Yam pointed out that the linked exchange rate system should be reviewed. This week, however, Yam suggested that Hong Kong review its US dollar peg and consider linking its currency to the Chinese yuan or renminbi.

Yam criticized the HKMA's focus on maintaining the peg and said this could be considered an ". . . obsession or even paranoid.”

Tsang said the system was implemented in 1983 and it is still the most appropriate system for Hong Kong as a small and open economy, and an international financial centre. He reiterated that he saw no need and had no intention to change the pact.

Monetary Authority Chief Executive Norman Chan said the authority also believed that the link should not be changed.

“The Monetary Authority has conducted detailed studies and analyses on various views on the Linked Exchange Rate System. Our conclusion remains that the Linked Exchange Rate System is still the most appropriate system for Hong Kong.”

He said the new uncertainties and potential shocks facing the world economy and financial system as brought by the Eurozone debt crisis underscore the importance of monetary and financial stability.

Chief Executive-Elect CY Leung also said the system served Hong Kong well over 30 years and he had no plan to change the system or the linked exchange rate level.

Besides linking the Hong Kong dollar to the yuan, Yam also suggested that Hong Kong possibly doing away with the exchange rate target and focus on managing domestic monetary conditions, and unify ". . . two different convertibility undertakings for the two elements of the monetary base, namely the bank notes in circulation and the aggregate balance".

A linked exchange rate system is a type of exchange rate regime that links the exchange rate of a currency to another. It is the exchange rate system implemented in Hong Kong to stabilise the exchange rate between the Hong Kong dollar and the United States dollar.

In this system, the government or central bank does not actively interfere in the foreign exchange market by controlling supply and demand of the currency in order to influence the exchange rate. Instead, the exchange rate is stabilised by an exchange mechanism in which the HKMA authorises note-issuing banks to issue new banknotes provided that they deposit an equivalent value of US dollars with the HKMA.