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Currencies
This Week in AsiaOpinion
Tom Holland
Tom Holland

Abacus | Hong Kong’s currency peg to the US dollar isn’t an Achilles’ heel – it’s an Achilles’ shield

  • The peg, which prevented a complete economic wipeout in 1983, has been described as a ‘deadly weakness’
  • But in truth it is an automatically self-correcting mechanism that today’s Hongkongers can be thankful for, writes Tom Holland

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The architects of the currency peg were aware that it would be impossible for Hong Kong to allow the free movement of capital while at the same time operating both a fixed exchange rate and an independent monetary policy. Photo: Roy Issa
Tom Holland
Apparently, Hong Kong has an “Achilles’ heel”. According to one Zhou Luohua, vice-president at the Chongyang Finance Research Institute of Beijing’s Renmin University, the city’s deadly weakness is its currency peg to the US dollar.
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In an article in the South China Morning Post last week, Zhou argued that the peg left Hong Kong’s economy extremely exposed to falls in local stock and property prices.

Because of the constraints of the peg, the Hong Kong Monetary Authority (HKMA) is not free like other central banks to pump unlimited liquidity into the local financial system.

“If asset prices are plunging, it would trigger an exodus of funds at the same time, translating into a double hit for the Hong Kong economy,” Zhou warned.

Now, the Chongyang Finance Research Institute sounds at first like a reputable academic institution. However, a quick look at its website might cause you to question that assumption.

Last week, for example, one of Zhou’s senior colleagues dismissed Hong Kong’s protesters as “confused”. Saying he has visited Hong Kong “several times”, he declared that “the idea that this is all about democracy is nonsense”.

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