Foreign exchange: Is the Hong Kong peg to the dollar unsustainable?
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Foreign Exchange

Foreign exchange: Is the Hong Kong peg to the dollar unsustainable?

Inflation at 16-year high; Wealth gap widens

The Hong Kong currency peg, in its present form, has existed since 1983. However, some Hong Kong observers have begun to question whether the HK dollar’s link to the US dollar is relevant and in the best interests of an economy facing runaway inflation and an ever-widening wealth gap.

The justification for the peg has been based on Hong Kong’s close economic links to the US economy, rather than to its neighbours. That is now being called into question. China is the key driver of the Hong Kong economy, analysts argue, and by remaining pegged to the US dollar the Hong Kong economy falls prey to economic distortions. Essentially, Hong Kong operates Chinese levels of growth within a US monetary policy framework. It is a bad combination.

Hong Kong’s inflation rate

Hong Kong’s inflation rate

As a result, inflation is now running at a 16-year high, which is fostering a widening wealth gap in the country. In a population of 7.2 million, a record 1.26 million Hong Kong residents were living in poverty as of mid-2010, according to the Hong Kong Council of Social Service.

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