HONG KONG: The city's de facto central bank reiterated yesterday its commitment to defend the Hong Kong dollar's peg to the US dollar.

"There is absolute no need to make any change in the peg system... Once you make a change, there will be more demands for other changes. This will damage the credibility of the peg," Joseph Yam, chief executive of the Hong Kong Monetary Authority (HKMA), told reporters in Beijing.

He made the comment in response to media questions about some market speculations that the Hong Kong government may consider widening the currency's allowable trading band.

For example, international bank ING Groep NV predicted that HKMA may widen the local currency's trading band versus the US dollar in the next one to two years, enabling it to appreciate as the mainland's economic growth lures investment to the city.

The HKMA injected about HK$189 billion ($24.4 billion) in the first half of 2009 to prevent the local dollar from strengthening beyond its permitted range of HK$7.75 to HK$7.85.

Tim Condon, chief Asia economist at ING in Singapore, said the limit may be eased to allow an advance to HK$6.80, adding that that's in line with his one-year projection for the yuan's rate against the US currency.

"The Chinese economy's stronger-than-expected response to the easier monetary and fiscal policy is attracting confidence-sensitive capital," he said. "That's going to be a source of headache for the HKMA and will lead them to eventually widen the band."

Hong Kong's currency has been pegged at about HK$7.80 per US dollar since 1983. It hasn't been weaker than HK$7.76 in the past four months. The yuan was at 6.8334 versus the greenback and Condon predicts it will climb 1.5 percent to 6.73 in 12 months.

The People's Bank of China approved on July 2 a trial for five mainland cities to use yuan for settling cross-border trade with Hong Kong, encouraging companies to replace the US dollar in their transactions.

Yam said July 9 he won't exclude the possibility of the yuan becoming the preferred currency used in Hong Kong even as the city's dollar acts as legal tender, according to the Wall Street Journal. He compared the situation with Macao, where the pataca is the official currency and most money in circulation is Hong Kong dollars.

Bloomberg News

(HK Edition 07/15/2009 page4)