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Antony Leung Kam-chung |
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Is Antony Leung Kam-chung, Hong Kong’s financial secretary, a political neophyte who blundered badly into a territory sown with hairtrigger mines – or is he a smart operator who knows how to run a softening-up campaign? This is the question sending Hong Kong’s chattering classes into a frenzy and giving financial market jitters over the past few weeks.
What has caused the intense speculation are remarks by Leung about the pegging of the Hong Kong dollar to the US greenback. The local currency is fixed at HK$7.80 to the US dollar, a rate that has remained happily steadfast for 17 years, during which none of Leung’s predecessors dared to discuss a change, either of the rate or the regime.
The press also treats the link as more or less a taboo subject. In addition, surely finance ministers – above all others – know the golden rule that you do not do anything to encourage markets to speculate about the value of your currency and whether there may be a change in the parity, especially not when your currency is fixed. For a former banker like Leung – previously Asia-Pacific head of Chase, who must know how volatile financial markets are and how fragile is confidence – to venture into a discussion about the currency suggests that something serious is afoot.
Yet here was Leung, not once but twice, making statements that have been interpreted as meaning that change might be in the offing, maybe a change in the parity or a move to a floating regime. In August he commented that the peg was an obstacle to an efficient economy. When he followed it in October with remarks that removing the peg would increase flexibility, the markets disregarded his additional proviso that now was not the time to remove the peg and focused on the fact that a discussion was in play.
“[These] are very bullish statements from a government official,” says Craig Chan, economist for greater China with ING Barings. “We never heard Donald Tsang [Yam-kuen] say anything like that when he was financial secretary. I think it’s a softening of stance from the government on the peg and the market is losing confidence.” Bank of America currency strategist Frank Gong adds: “The market somehow believes the peg will eventually have to go, and now they’re demanding some risk premium.”
Indeed, the one-year Hong Kong dollar surged to a premium of 280 to 300 basis points over the spot rate during intra-day trade in the wake of Leung’s remarks, a sharp rise from the 72bp to 83bp range of the previous day.
The financial secretary’s comments have tapped into deep unease among some economists and business executives about the high costs and drag on economic growth of being linked to the US dollar when other rival economies have benefited from a devaluation against the greenback. It would be nice, one businessman mused, to see a devaluation of up to 30%, or maybe how about a nice round HK$10 to the US dollar?
At this point, head of the Hong Kong Monetary Authority Joseph Yam waded in with the strongest words, giving a definite no to the idea of abandoning the link to the US dollar. “The outcome, even with the most benign conditions and the best judged strategy, can be summarized in two words: uncertainty and instability,” Yam said, and added: “If, heaven forbid, de-pegging were to be carried out in the conditions that we have now, then we might add a third word to uncertainty and instability – catastrophe.
“At this time of great global uncertainty and local distress, our efforts should be directed towards building stability, not destroying or undermining it.” It was a blunt rebuff to Leung and it has had the effect of calming the market, where the premium in the one-year forward market for the Hong Kong dollar fell to 100bp to 120bp over the spot rate.
Although the immediate Hong Kong dollar jitters were calmed, the debate goes on, not just about the viability of the peg but why Leung dared to tread where angels fear to go. Some economists believe that the financial secretary has embarked on a softening-up campaign and that in the end the peg will have to go.
Some of Leung’s more friendly critics believe that the financial secretary is just very worried about the plight of the local economy and is trying to show his concern. He has certainly got a lot to worry about.
Also, Leung’s immediate predecessor, Donald Tsang – who has stayed firmly out of the dollar debate – commented bleakly in his new capacity as chief secretary for administration that: “We are facing a rough time, a pretty tough time … perhaps the worst since the Korean War.” Not only is Hong Kong in recession, with few signs of an upturn – and one international investment bank predicting negative growth of 7% – but unemployment is at new highs and the government budget deficit is growing by the week.
No wonder Leung and others are casting round looking for some magic bullet that might restore fortunes. A devaluation looks attractive because it would, its advocates assert, boost competitiveness at a stroke. On the World Economic Forum’s latest Global Competitiveness survey, Hong Kong has slumped to thirteenth place from seventh last year and second in 1999, partly because of the high costs imposed by the peg.
The problem with a devaluation is that once you change the rate, the market may get in the mood for another change and add to pressures for it. In addition, although a devaluation would make Hong Kong’s goods and services cheaper, it would trigger inflation through higher prices of imported goods on which Hong Kong also depends.
Those with longer memories also recall what happened immediately before financial secretary Sir John Bremridge imposed the peg in the early 1980s. There was a crisis of confidence – the dollar skidded in a day from five to almost 10 against the US dollar and a scared Hong Kong public swept supermarket shelves bare as they feared their money was worthless.
Alan Smith, vice-chairman of Credit Suisse First Boston, says: “I don’t think they are going to change the peg. It was not put in place to give economic advantage, but for reasons of social stability. Immediately before the peg was introduced there was such a crisis of confidence that people believed that money had no value, so you had better spend it. If [the peg] means that we have to bear some economic hardship, that is the price we have to pay. The financial secretary was right in saying that the consequences of having it inhibit his freedom of movement.”
Smith and chief secretary Tsang just trust that once the world economy gets on the road to recovery Hong Kong will once again show the way. As Tsang says: “As soon as you see the US economy on a climb, you’ll find Hong Kong close behind.”
Even though the immediate debate may be over, some commentators say they can predict when the Hong Kong dollar peg to the US unit will be removed – when the People’s Republic of China makes its renminbi fully convertible. At that point Hong Kong will hitch its dollar to the PRC.
