Calls for US dollar peg review rejected in HK

Hong Kong Financial Secretary John Tsang rejected calls from lawmakers to review the city's 29-year-old dollar peg amid rising concern asset prices are being driven to unsustainable levels by record-low borrowing costs.

The exchange-rate system ties the city's monetary policy to that of the US, where the Federal Reserve is using near-zero interest rates to help the economy recover from a recession.

Linking the Hong Kong dollar to a basket of currencies won't have much effect on local rates, Tsang told the Legislative Council on Wednesday.

"It is not transparent enough and is more complex and hard to understand," he said. "A peg to a basket is still a fixed exchange-rate system and it also takes away an independent monetary policy. Interest rates wouldn't be much different from the current levels."

Hong Kong's home prices more than doubled in the past three years and have surpassed their 1997 peak, fueled by low interest rates and purchases by mainland buyers. The Hong Kong Monetary Authority bought a combined $4.2 billion of the US currency this month, defending the upper limit of the peg for the first time in three years, as a third round of asset purchases by the Federal Reserve boosted the supply of the greenback.

The peg "isn't the main reason" behind the pickup in capital inflows as other Asian countries are experiencing similar surges, Tsang said. His comments echoed those of the city's monetary chief Norman Chan, who said on Nov 9 that talk of so-called hot money flowing into Hong Kong to speculate on the yuan is "unfounded."

Hong Kong linked its exchange rate to the US dollar in 1983 when negotiations between China and the UK over the city's return to Chinese rule spurred capital outflows. In 2005, policy makers committed to limiting the currency's decline to HK$7.85 per dollar and capping gains at HK$7.75.