Hong Kong could switch to yuan, dump US dollar peg: businessman Allan Zeman

Investors holding local stocks and bonds did not want to see the US dollar value of their investment tank alongside the currency, a problem that Hong Kong has long managed to avoid with its dollar peg.

“Stability is key to Hong Kong’s status as a financial centre,” said Kelvin Lau, a senior economist at Standard Chartered. “The peg anchors confidence. This has served Hong Kong’s industries well, particularly the financial services sector.”

Most people in the business community believe the peg has served Hong Kong well.

The question is whether the city should remain pegged to the US dollar, or switch to linking to the yuan. Hong Kong is increasingly tied to the cycles of the mainland’s economy, so it might as well adopt the mainland’s interest rates, according to some analysts.

The Hong Kong dollar’s peg to the US dollar has resulted in increased costs for Hong Kong manufacturers with production on the mainland, because their costs are in yuan and their prices are in US dollars. If there is a long fulfilment period, the yuan may fluctuate, increasing either costs or revenue. The Hong Kong dollar has weakened against the yuan by about 26 per cent over the past 10 years.

“Most exporters have production in the Pearl River Delta, for which they need to use yuan, for wages and buying in the mainland. Everybody knows that the yuan is going up … If we take an order from a US customer but the delivery is in three months, we calculate the rate of yuan appreciation. We will add a bit of surplus [to prices] as a kind of safety,” Lau said.

Most agree that full convertibility of the yuan is a precondition for adopting it as Hong Kong’s base currency, and most expect that that is where the yuan is heading.

Zeman thinks Hong Kong will forgo the pegged currency format and use the yuan outright. “It would make sense, given that Hong Kong is so tied to China.”

Full article: Hong Kong could switch to yuan, dump US dollar peg: businessman Allan Zeman (South China Morning Post)

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