Tsang rejects calls to end peg

There is no better alternative to the HK$ to US$ peg.

Financial Secretary John Tsang defended the current exchange-rate system against a growing clamor among Hong Kong legislators who claim rising asset prices are being driven to unsustainable levels by record-low borrowing costs.

Hong Kong’s system ties its monetary policy to that of the U.S. The U.S. Federal Reserve is currently using near-zero interest rates to help the economy recover from a recession and fight stubbornly low unemployment.

Tsang told the Legislative Council that linking the Hong Kong dollar to a basket of currencies won’t have much effect on local rates.

“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.”

Tsang pointed out the peg is not the main reason behind the rising tide of capital inflows since other Asian countries are experiencing similar surges. His comments were similar to those of Norman Chan, head of the Hong Kong Monetary Authority, who said last week that talk of hot money flowing into Hong Kong to speculate on the renminbi is unfounded.

Last month, HKMA bought a combined US$4.2 billion of the U.S. currency to defend the upper limit of the peg for the first time in three years due to a third round of asset purchases by the Fed boosted US dollar supply.

Hong Kong’s home prices more than doubled in the past three years. These have since surpassed their 1997 peak fueled by low interest rates and purchases by mainland Chinese.