Architect of Hong Kong dollar peg defends the policy

John Greenwood is largely credited for helping the Hong Kong government create the local currencyÆs peg to the US dollar in 1983.
In a news briefing where Invesco Limited chief economist John Greenwood was meant to talk about his investment outlook for 2008, he ended up defending the Hong Kong dollarÆs peg to the US dollar amid a barrage of questions from reporters keen on picking the brains of the so-called architect of the peg.

ôThe fixing to the US dollar is the right and proper policy at the present time,ö says London-based Greenwood.

Indeed, Greenwood has supported the peg since he authored an article in the bimonthly journal Asian Monetary Monitor, which has been largely credited for forming the basis for the Hong Kong governmentÆs decision in 1983 to peg the currency to the US dollar. He has been a member of the Currency Board Committee of the Hong Kong Monetary Authority since 1998, something Invesco refers to as recognition for his contribution to the policy.

Greenwood says the recent concern over how rising consumer prices in China are affecting Hong Kong is not a good enough reason to even consider abandoning the peg.

ôThe impact of inflation from China is exaggerated,ö he says. ôInflation (in Hong Kong) is because of inflation here.ö

He notes that ChinaÆs consumer prices only affect food, which is a relatively small component on inflation in Hong Kong.

Greenwood declined to elaborate, noting the Invesco investment outlook briefing wasnÆt the proper forum to talk about the peg. Invesco, a global investment management company that operates in 20 countries, has around $500 billion in assets under management worldwide.

On previous occasions, Greenwood has praised the peg for its simplicity and transparency.

Under Hong Kong's currency board system, the Hong Kong dollar is pegged at 7.80 to the US dollar, but is allowed to trade between 7.75 and 7.85. When the Hong Kong dollar reaches the limits of its trading band, the Hong Kong Monetary Authority (HKMA) has the flexibility to intervene to help stabilise the exchange rate.

When the peg was introduced 24 years ago, it succeeded in putting a stop to the depreciation of the Hong Kong dollar during a currency crisis in 1983 and helped rebuild confidence in the local currency.

However, the peg has been the subject of much criticism since then. It is seen as the culprit behind the inflation and asset market bubbles in the 1990s as well as the deflation and unemployment that resulted from those difficult years. The relevance of the peg has come into question once again because of the weak US dollar and the growing importance of the Chinese yuan globally.

Jim Rogers, considered by many as a guru in commodities investing, has said he believes the peg is a ôhistorical anomalyö that needs to be abolished. Rogers, U.S.-based founder of Diapason Rogers Commodity Index Fund who previously co-founded the Quantum Fund with George Soros in 1970, believes it would be better for Hong Kong to transition into a renminbi economy once the Chinese currency becomes convertible.

HKMA chief executive Joseph Yam has said that the Hong Kong government has no plans to re-peg the local dollar at a different level against the U.S. dollar or widen the current trading band.
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