The Future of Hong Kong's Monetary System
Mr Tony Latter, Visiting Professor,
EXCERPTS
Long term future of monetary system
In order to understand the possible future of the monetary system, said Professor Latter, one had to appreciate the history and the institutional structure.
The history was that Hong Kong was a colony. Colonies did not have central banks. They either used the metropolitan currency, or established a currency board based on the metropolitan currency. Hong Kong was an exception. It was a trading post for China, and it used silver as its currency as China did. This was a kind of silver standard, as employed by China. When China left the silver standard in 1935, Hong Kong faced a quandary. It had no central bank and so could not handle a managed float. So it adopted a currency board based on sterling.
So it was not the case, Professor Latter emphasized, that Hong Kong's currency board was invented in 1983. Hong Kong adopted a currency board in 1935, and inadvertently left it in 1972 amid the international currency turmoil and, in particular, the weakness of sterling at that time. The territory then survived more by luck than good judgement until the early 1980s when the stresses of the impending transition of sovereignty began to overwhelm the currency and it was realized that it had been a mistake to abandon the currency board.
. . .
Institutional arrangements
Nonetheless, Professor Latter emphasized, Hong Kong's de facto central bank differed in important respects from central banks overseas. Elsewhere the central bank was a separate corporate entity and statutorily independent of the government. For example, in order to qualify for membership of the European Central Bank (ECB), national bank heads had to demonstrate that they were statutorily independent from the finance minister. The HKMA, in contrast, was not independent. The Monetary Authority was a legal person appointed by the Financial Secretary. The Financial Secretary could appoint or dismiss him at will, and give instructions to him as he saw fit. Nor was the Financial Secretary answerable democratically to the people.
The Financial Secretary thus had the freedom, and lack of accountability, to take major decisions on the monetary system himself.
...
What would be the alternatives to the US dollar linked rate system? If there had not been the peg, there would not have been the inflation of the 1980s and 1990s, nor the deflation of recent years. But instead there would have been a fluctuating exchange rate. Would that have been worse? It was difficult to say. Nonetheless, three or four years ago, when people had been complaining about the effect of the linked rate, there had been no coherent proposals to replace it.
...
Should the Hong Kong dollar be pegged to or shadow the RMB? A lot of nonsense had been spoken about this, said Professor Latter, albeit that the RMB had been stable against the US dollar for eleven years, and China's internal prices had adjusted considerably to accommodate the fixed rate. However, if China moved the peg once, the markets would not believe that it could move back. The RMB could not be a backing currency for a currency board since the RMB was not freely convertible. So for the Hong Kong dollar to track the RMB would be a managed float with intervention.
A further reason not to consider the RMB was that structurally, the monetary economy of China was about to undergo profound change. In particular, capital controls were going to be lifted. When this happened, the RMB might even fall - and then would Hong Kong want to go down with it? Further, the People's Bank of China had no track record of managing a free floating currency. Perhaps they could do it, but it was just not known. In contrast, the US Federal Reserve was well known for its capability and disciplined management.
There was no ground in the Basic Law for Hong Kong to abandon its independent currency, said Professor Latter. Far from it, Hong Kong's constitution mandated its monetary independence. Was China's size a factor? Should Hong Kong follow its neighbour simply because it was big? Professor Latter drew attention to the examples of Canada and Mexico, which were much smaller than the US and more dependent economically on it than Hong Kong was vis a vis China, and yet had independent currencies. Switzerland and Germany were a further example.
Was the volatility of the US dollar a problem? It was true that the US dollar had been volatile. A basket of currencies would be more stable on average. Given today's technology, a basket could be managed relatively easily. However, it was difficult to monitor. It would not be transparent to the man in the street. Thus confidence might would be difficult to sustain. And a link to a basket of currencies was still a fixed rate system. The implication of such a system was that one had to surrender control of one's monetary policy. One had to accept the monetary policy of the economy to which one's currency was pegged.
In 1983, Hong Kong had chosen a currency board because it did not have a central bank. If it had had a central bank then, it might have chosen otherwise. Now, Hong Kong in effect did have a central bank, and could decide to adopt a managed float system. Nonetheless, the latest changes to the linked rate system were in line with the way the system had been operated in recent years, and essentially confirmed the way the system was already operating.
@:
http://www.hkdf.org/...newsarticle=164
This post has been edited by DrBubb: 21 July 2005 - 07:48 AM
Gwailo, on Sep 22 2005, 09:26 AM, said:
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