Hong Kong has no plans to change its currency peg with the US dollar, especially during the financial market turmoil, Chief Executive Donald Tsang said yesterday.

He also said Hong Kong is well equipped to deal with a financial meltdown, having learned lessons from the 1997-98 Asian crisis, during which the government propped up the stock market to ward off currency speculators.

Economists argue that a prolonged slump in the US dollar could fuel inflation in Hong Kong that policy makers would not have the tools to control because the currency peg means the territory tracks US interest rates, which were cut last week to a four-year low.

But Tsang firmly rejected the idea of jettisoning the peg.

"Our linkage with the US dollar is the right policy for now and for the foreseeable future, particularly during this period of great financial turmoil," Tsang told reporters.

"If the US dollar sinks, we will sink with it," he said, underscoring the point by adding that changing the system would be "the worst thing to do at this stage".

Market speculation of a change in the peg rises during times of economic stress.

Financial Secretary John Tsang and Hong Kong Monetary Authority (HKMA) chief Joseph Yam have repeatedly stressed Hong Kong's commitment to the peg, which was introduced in 1983 when Hong Kong was still a British colony.

The peg means that the HKMA tracks rate moves by the US Federal Reserve, which has slashed its fed funds rate to just 1.5 percent in the face of the global credit crisis.

The Hong Kong base rate is at 2 percent, significantly lower than inflation of 4.6 percent.

So far, the Asian finance hub has withstood the global economic storm, and it is "not technically, and not in any sense of the word" in a recession, Tsang said.

But, he said, economic growth will be slower this year than last year, the jobless rate will rise and a recession is possible later, although he did not predict when.

Hong Kong has been strengthening business links to the mainland, and Tsang forecasted that the city will be a "major beneficiary" of the mainland's strong growth.

"That gives us a certain buffer," he said.

The government forecasts economic growth will ease this year to between 4 and 5 percent after averaging 7.3 percent for the past four years.

Reuters

(HK Edition 10/17/2008 page2)