Hong Kong battles peg pesomism


As Buenos Aires shoppers fret about the peso, Hong Kongers have other fears: the yen's run and a rising jobless rate.

By Nick Easen

HONG KONG, China (CNN) -- Now that Argentina has scrapped its peg to the U.S. dollar, Hong Kong is virtually the only major economy in the world that maintains such a rigid currency ratio.

And the former British colony has every intention of keeping its 18-year old link to the buck.

As Argentina's economy collapsed and the country descended into chaos, authorities finally buckled and on Sunday devalued the peso almost 30 percent.

Hong Kong officials have sought to reassure the world there is no threat of similar troubles for the Chinese territory. Argentina and Hong Kong have vastly different economic fundamentals, they say.

But on Thursday, the man known as Mr. Yen said he sees problems for Hong Kong's peg.

Could the Hong Kong dollar suffer a similar fate as Argentina's peso?

Political commitment still strong

Lack of overseas debt, large foreign-currency reserves, a strong banking system, political stability and a good record of prudent policies have all been cited as reasons to keep Hong Kong's peg in place.


Hong Kong's free economy and a wad of cash at its central bank may save its peg while Argentina's couldn't hold

"The 1:1 peg was crippling the Argentine economy, we don't seem to be seeing that with Hong Kong" says James Malcolm, a Singapore-based foreign-exchange analyst with J.P. Morgan.

"The outlook still looks good for the peg, as there is a strong political commitment in Hong Kong to maintain it," he reiterated.

Presently Hong Kong is more concerned about the effects of a weakening Japanese yen, now near a three-year low, than the fate of its linked currency.

Hong Kong has other big issues, such as rising unemployment, slumping home prices and deflation.

On Thursday, a landmark court decision sent thousands of Chinese residents back to the mainland, sure to bring much human misery to the families affected.

Benefits seemed the same

But analysts agree that, Hong Kong's problems aside, the former British colony has not contracted Argentinean market contagion because the two economies are fundamentally very different.

Of course, both places used to think fixing their currencies against the dollar had similar benefits.

A peg makes life simple for companies trading with the United States, and vice versa. It also reduces the risk of stock-market gains or shipments seeing their value erode, if the peso or Hong Kong dollar were free to slip.

Still, the Argentine currency board announced on Sunday that it would devalue the peso to 1.4 pesos to the U.S. dollar, abandoning its decade-long 1:1 peg.

They promised to introduce a free-floating system in six months. They delayed their introduction of a somewhat confusing "dual exchange rate" on Wednesday, for a day.

But trading is slated to resume on Thursday, with the 1.4 peso rate fixed for investment and the peso free to float for the man on the street.

Lessons to be learnt

A lack of direct trade with South America and HSBC Bank's limited exposure to Argentina has meant that Hong Kong has not been substantially affected, at least directly.

But parallels between the two pegs -- warranted or unwarranted -- have been drawn even by analysts who know "microfundamentals" in Argentina and Hong Kong are quite different.

The Argentinean peso peg to the buck produced an overvalued peso. That made it increasingly hard for Argentineans to afford living in their own country, as goods became more and more expensive compared to what they earned.

Argentinean companies also found it harder to compete with South American competitors, particularly in Brazil. Brazil's currency, the real, could fall, making Brazilian goods cheaper overseas. But Argentina's peso couldn't budge.

Hong Kong has also been able to sustain its currency peg because its laissez faire economy is subject to more price competition than in Argentina.

Property prices and wages have both seen dramatic decreases since 1998.

Hong Kong's free trade status, capital reserves and nonunion labor force has allowed Hong Kong to have greater versatility than Argentina.

By contrast the South American nation has been hampered by a highly regulated labor market and strong unions opposed to wage and price flexibility.

Hong Kong is big bucks

Like Singapore, Hong Kong has also maintained huge foreign-currency reserves, to back up its currency.

In other words, for every Hong Kong dollar bank note issued by the Monetary Authority (HKMA), the territory has an equivalent in U.S. dollars.

Any change in the monetary base has to be matched by a corresponding change in the amount of U.S. dollar reserves.

In Argentina there may not have been a need for devaluation if either the economy or the exchange rate had been more flexible in the first instance.

As it stands, critics say the peso should probably have depreciated by about 40 percent against the U.S. dollar.

Experts say Hong Kong's dollar is still worth its weight in U.S. dollars -- more reliable than gold. And Hong Kong's officials say they have no intention of changing that.

The Secretary for Financial Services, Stephen Ip, told radio station RTHK that "it would be unfair to compare Hong Kong's link with that formerly adopted in Argentina."

Those sentiments were reiterated by the Hong Kong Monetary Authority. That combination of stability and cash to back it up is reason Hong Kong, despite its peg, has not suffered a loss of confidence in Argentina's wake.

Currency traders say Hong Kong faces a much bigger problem than Argentina fallout, anyway.

The Japanese yen hit more than 133 to the dollar on Wednesday. That makes life difficult for Asian companies that compete with Japanese ones, whose goods are getting cheaper.

The recent run has already raised hackles in South Korea and China. On Thursday, Eisuke Sakakibara, a former official known as 'Mr. Yen," said the yen could go to 160 this year.

That would spell deep trouble for Hong Kong's peg, he noted, and mean problems for Malaysia's peg on its currency, the ringgit.

Sakakibara brought up an idea that has gained a little ground since the Euro went wide -- that Asian countries should work together for a currency union.