Currency Issues in Hong Kong and in China: The Dollar Peg and the Renminbi

• Author: Kenneth S. Chan,David E. Cook
• Published date: 01 February 2014
• DOI: http://doi.org/10.1111/1468-0106.12050
• Date: 01 February 2014

CURRENCY ISSUES IN HONG KONG AND IN CHINA:

THE DOLLAR PEG AND THE RENMINBI

The papers in this special issue are from the conference on the Linked Exchange

Rate of Hong Kong in 2012 and the conference on the renminbi (RMB) and the

Global Economy in 2013. Two important issues were addressed at these two

conferences held in Hong Kong. The f‌irst issue pertains to the RMB and the

impacts from the growing Chinese economy. The second issue is the linked

exchange rate system in Hong Kong.

At present, the currency board system of Hong Kong is entering into its fourth

decade as the monetary arrangement for the region, maintaining the value of the

Hong Kong dollar at a constant level relative to the US dollar. Compared to the

instability observed prior to its implementation in 1983, it must be agreed that the

exchange rate peg has proven to be an effective nominal anchor through a span of

time that included the sovereignty return of Hong Kong to China as well as the

Asian crisis of the late 1990s. Many of the specif‌ics of the peg have undergone f‌ine

tuning as regional and international f‌inancial institutions have altered. These

changes include the extension of the convertibility undertaking to reserves in 1998

and the development of joint weak side and strong side convertibility in 2005.

Regardless of these ref‌inements, the main focus of the peg, keeping the exchange

rate near a value of 7.8 Hong Kong dollars per US dollar, has remained essentially

in place for more than 30 years. The authorities in Hong Kong maintain com-

mitted to these arrangements and even neutral observers at the IMF (2013, p. 19)

express belief that ‘The Linked Exchange Rate System (LERS) has served Hong

Kong SAR well for nearly three decades

Still, recent times have presented unique challenges. By the same token,

evolution in global monetary arrangements has raised new possible alternatives

to a US dollar peg. The set of papers presented in this volume focus on: (i) the

challenge of the zero lower bound to interest rates that occurs in a liquidity trap;

and (ii) the possible alternative of pegging the exchange rate to a basket of

currencies.

McCallum’s paper in this special issue unif‌ies the two issues in the context of

monetary policy rules that endogenously adjust target exchange rates in

response to domestic business cycle and inf‌lation conditions. This paper notes

that Singapore’s monetary policy is organized around an adjustable peg to a

basket of currencies. Empirical work shows that this can be represented as a

monetary policy rule that adjusts the exchange rate in response to business cycle

conditions, in the same manner that a Taylor rule adjusts interest rates.

McCallum goes on to point out that such a rule can be an especially effective

commitment mechanism that can relax the constraints that liquidity traps

impose. Finally, the paper considers whether Hong Kong’s political economy

conditions can support an adjustable currency peg.

The paper by Feldkircher and Korhonen simulates the global impact of an

output shock and a real appreciation of the RMB. They do this through a global

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Pacif‌ic Economic Review, 19: 1 (2014) pp. 25–26

doi: 10.1111/1468-0106.12050

© 2014 Wiley Publishing Asia Pty Ltd