Rising yuan not to alter HK dollar peg to US

(China Daily HK Edition)
Updated: 2006-11-29 10:24

Hong Kong expects no direct impact from the persistent appreciation of the yuan on its own currency, which is pegged to the US dollar, the city's financial secretary said yesterday.

The yuan is almost at parity with the Hong Kong dollar, which is tied to the US currency at 7.8 per US dollar, and is expected to continue appreciating.

That has led some to speculate that appreciation of the yuan, also known as the renminbi, would eventually trigger a move on Hong Kong's currency because of its links to the Chinese mainland's economy.

"The peg has served us very well. I have no intention of changing it," Financial Secretary Henry Tang told a business luncheon. "I don't expect appreciation of the renminbi will have any direct impact on the Hong Kong dollar."

The yuan's rise was slow and had been anticipated by the market, he said. Hong Kong's move last year to fix an upper limit for the Hong Kong dollar at 7.75 to the US dollar and widen its lower trading limit to 7.85 was in anticipation of the yuan reaching parity with the Hong Kong dollar.

Parity between the two currencies was a "psychological barrier" for Hong Kong and its people were taking it in their stride, he said.

Further appreciation of the yuan could have economic consequences, including adding to inflation as the territory imports much of its food from the mainland, Tang said. Inflation in Hong Kong is low, though, and the government expects it to average 2 per cent for this year.

The yuan has strengthened about 3.4 per cent since Beijing dropped its peg to the US dollar in 2005 and was trading at 7.8471 to the US currency yesterday.

Its upward march has led economists to believe that Hong Kong would eventually have to relinquish its own currency's peg to the US dollar by, for instance, linking it to the yuan.

"The renminbi is not convertible currently so there is no question of us linking our convertible Hong Kong dollar to a non-convertible renminbi," Tang said.

DBS Bank, in a report published yesterday, said there was no need for Hong Kong to dismantle its currency peg.

"The numerical convergence in the USD/CNY and USD/HKD rate is no reason for Hong Kong to abandon its currency peg to the US dollar and shift its link to the yuan," DBS Bank said.

"Despite increased economic integration between Hong Kong and the mainland in the trade and services sectors, the territory's economic cycle remains more closely tied with the US"

Tang also said yesterday that the government would publish a report early next month outlining progress on a nine-month public consultation process over a proposed and unpopular goods and services tax.

The consultation on the proposed sales tax began in July, but many analysts see little chance that the controversial tax would be adopted. Tang yesterday conceded that launching the consultation was an "uphill battle" given the economy is robust and forecast to grow 6.5 per cent this year, making it difficult to explain the need for a new tax.

The government argues that Hong Kong needs to expand its tax base to avoid a repeat of hefty budget deficits run up in the years following the 1997-98 Asian financial crisis.

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