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Opinion | Why Hong Kong must ditch the US dollar peg and switch to the yuan now
- Hong Kong risks being increasingly led by US monetary policy, which could see property prices and the economy come crashing down
- Switching to the yuan would mean stability and a unique chance to ride the currency’s rise before it becomes fully convertible
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Hong Kong’s currency peg to the dollar is not sustainable. The city risks being increasingly led by US monetary policy as the utility of the fully convertible Hong Kong currency in meeting China’s demand for US dollars is fading. As global yuan demand grows, switching to that currency would boost Hong Kong’s financial fortunes.
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With China’s interest rates expected to stay lower than US rates, due to lower Chinese inflation, embracing the yuan would stabilise Hong Kong’s asset markets. Sticking with a US-pegged currency, however, means exposure to volatility. Entrenched US inflation threatens to bring back dollar swings like in the 1970s and/or US interest rate surges like in the 1980s – the effect on Hong Kong could devastate its property market.
It is entirely possible for Hong Kong to switch to the yuan. The Chinese currency is not yet fully convertible but its offshore component is significant, at about 2 trillion yuan (US$283 billion). Foreign holdings of yuan bonds exceed 3 trillion yuan.
Beijing’s primary concern is its ability to control the yuan exchange rate. If the offshore component is too big, it may lose control. Given China’s foreign exchange reserves of US$3.2 trillion, and a current account surplus of over US$400 billion, adding Hong Kong to the offshore yuan world appears manageable. The yuan will become fully convertible one day anyway – a Hong Kong switch to the yuan could be a desirable transition.
Riding on the yuan’s rise would be a big plus for Hong Kong. The yuan accounts for just over 2 per cent of the global payments system, and about the same in global forex reserves. China accounts for about 18 per cent of the world economy and around 30 per cent of global manufacturing output. The yuan’s share in global payments and currency reserves is bound to rise. Before it becomes fully convertible, Hong Kong has a unique opportunity to ride its rise and consolidate its status as a global financial centre.
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Hong Kong could start the transition by shifting the government payroll to yuan and start collecting taxes in yuan. As the stock market gradually makes the shift, along with asset markets and the real economy, bank deposits and credit would follow naturally. The Hong Kong dollar would fade away.
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