China's yuan climbed above the Hong Kong dollar's fixed rate for the first
time in 13 years, underlining China's economic ascent and fueling debate over
whether to scrap the city's exchange-rate link to the US dollar.
Renminbi banknotes and coins vs US
yuan rose 0.12 percent to 7.7980 to the US currency at 10:35 am in Shanghai
compared with a close of 7.8075 yesterday, according to data compiled by
Bloomberg. Hong Kong's de-facto central bank prevents the Hong Kong dollar from
trading more than 5 cents either side of 7.8 per US dollar.
Gains in the yuan, which is at its strongest since a decade-long dollar link
was scrapped in July 2005, may add to pressure on Hong Kong to adjust a
23-year-old currency peg to reflect growing economic ties with the Chinese
mainland. The Hong Kong Monetary Authority says any change would rock
investor confidence. It has spent the past three years stopping gains, after
decades of fighting speculative attempts to weaken the currency.
"Breaking 7.80 is psychologically impressive, but it's just a passing point
or a passing ceremony," said C. H. Kwan, a Tokyo-based senior fellow at Nomura
Institute of Capital Markets Research, a unit of Japan's biggest brokerage. "The
Hong Kong dollar is likely to remain pegged to the US dollar at a central rate
of 7.80 in coming years, even though the yuan heads higher."
As the HKMA held the Hong Kong dollar steady, the yuan, or renminbi, has
advanced 5.6 percent from the 8.3 per dollar at which it was pegged until July
HKMA Chief Joseph Yam wasn't immediately available for comment today. He said
on Aug. 25 that 7.8 was a "psychological level."
"Psychological levels, once breached, dissipate quickly in terms of their
market influence, as we saw when the exchange rate of the renminbi breached
eight" to the dollar, said Yam in August. "It should not be an important factor
in the determination of an exchange-rate policy."
Of 10 strategists surveyed by Bloomberg News, only Westpac Banking Corp.,
Australia's fourth-biggest bank, predicts the link will end by 2008, forecasting
a rate of HK$7.20 by 2010. The currency's spot rate today was HK$7.7953.
"The clock is ticking," said Sean Callow, a senior currency strategist at
Westpac today. "I think if you ask any Asian policy makers, they're in agreement
that the US dollar is heading lower in the long term. This makes the Hong Kong
dollar look unnecessarily cheap."
China's stock market surpassed $1 trillion in value after major benchmarks
more than doubled last year, making it the world's 10th biggest equity market,
according to data compiled by Bloomberg.
The nation's trade surplus swelled 74 percent to a record $177.5 billion last
year as exports surged, the government said today. US Treasury Secretary Henry
Paulson and Federal Reserve Chairman Ben S. Bernanke, visiting Beijing last
month, urged China to relax controls on its currency to ease the imbalance.
"This reinforces the story that China's still got huge surpluses and needs to
deal with them," said Thio Chin Loo, senior currency strategist at BNP Paribas
SA in Singapore. "The pressure for more gains isn't going to go away."
Basket of Currencies
Ben Simpfendorfer, a currency strategist at Royal Bank of Scotland Plc, said
last week that Hong Kong may peg to a basket of currencies within five years. It
may eventually link to the yuan once China's government allows greater
convertibility, he said.
"Any change to the Hong Kong peg is still a long way off," said Shahab
Jalinoos, head of Asian currency strategy at ABN Amro Bank NV in Singapore.
"Whilst getting closer, China's and Hong Kong's economy are still very
Gains in the yuan have made Hong Kong's exports cheaper relative to Chinese
mainland products and boosted the spending power of mainland tourists.
Visitors from the mainland accounted for more than half the city's
22.8 million visitors in the first 11 months of last year.
The city's economy grew at a 6.8 percent pace in the third quarter, four
times faster than the US rate of 1.6 percent, though slower than China's 10.4
percent. Consumer prices rose 2.2 percent in November from a year earlier as a
stronger yuan made imports from China more expensive.
The monetary authority has to set its benchmark rate in step with the Federal
Reserve to maintain the peg, rather than seeking to cap prices. Lenders
including HSBC Holdings Plc. in November cut interest rates to their best
customers, which may further stoke spending by consumers and companies.
The interest rate banks charge each other to borrow the Hong Kong dollar for
one year is 1.24 percentage points lower than that for the US dollar. The gap
was 1.31 percentage points on Jan. 2, the widest in 19 months.
John Greenwood, a member of a board that advises the HKMA on currency policy
and the chief international economist at Invesco Asset Management Ltd. in
London, said in November there had been no discussion of changing the peg when
the group considered the impact of the rising yuan.
"There's always been those in the market who think there will be some change
to the Hong Kong dollar because of movements in the yuan, but it's just a myth,"
said Greenwood, who developed the peg. "The nominal convergence to 7.8 is
nothing more than an arithmetic coincidence."