HK dollar peg: Lessons for Washington

When Hong Kong tied its currency to the US dollar 30 years ago this week, watchers wondered whether an economic remedy could cure a political disease. Posturing by Beijing and London over the territory's future had plunged the currency into crisis. There is an irony, then, that the peg reaches its birthday just as posturing in Washington risks undermining the very credibility that Hong Kong clung to in 1983. Debate over the peg's suitability has been a perennial since it was introduced. But even with the staggering irresponsibility being shown by the US, the fact remains that Hong Kong and China do not yet have a choice.

Hong Kong can be commended for maintaining a virtually unaltered currency regime through a period including Asia's financial crisis, Sars, China's meteoric rise, and the global crisis in 2008. And it was achieved in an open economy now five times the size of others with similar currency regimes, according to ANZ. Peg critics argue that US interest rates are increasingly unsuitable for Hong Kong. Certainly, an alarming housing bubble has developed. But that is not solely the fault of the peg: anything as closely linked as is Hong Kong to China's emergence - think commodities, luxury goods - has seen valuations soar. Hong Kong cannot just switch to the renminbi, either. Converting the territory's $300bn of reserves means finding Rmb1.8tn, or more than exists in the entire offshore renminbi market, the Hong Kong Monetary Authority says.

Lex in 1983 commended the peg's simplicity but warned that success depended on confidence, which could be restored only by politicians. Deng Xiaoping and Margaret Thatcher managed to do that. The US will be too consumed by its own drama to reflect on lessons from 30 years ago. But confidence is as relevant to the world's biggest economy now as it has been to helping Hong Kong grow eightfold since then.

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