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HK dollar depreciation not a viable option
( 2003-07-28 15:38) (China Daily HK Edition)

The International Monetary Fund swiftly and unequivocally shot down a highly-speculative front-page report in the Friday edition of South China Morning Post that it had doubts about the Hong Kong's linked exchange rate system.

Let's make no mistake about it. The Hong Kong government, backed by nearly HK$300 billion in fiscal reserves and the support of the mainland government, has remained as unwavering as ever in its determination to maintain the linked exchange rate to the US dollar.

There is simply no economic benefit that can be derived from decoupling. It is a well-known fact that no economy can devalue itself out of a recession. In many cases, currency devaluation by one exporting country to boost its export competitiveness will prompt its competitors to follow suit. Competitive devaluation is not going to do anyone any good.

What's more, export competitiveness is not an issue for Hong Kong. The bulk of Hong Kong's exports is made up of re-exports to and from the mainland, especially the Pearl River Delta region, which has become a world manufacturing powerhouse. Currency devaluation is not going to benefit Hong Kong which is uniquely positioned to provide value-added services to China's external trade and commerce.

Instead, currency stability is seen as essential to maintaining Hong Kong's position as the premier financial and trade servicing centre of the region in general and the Pearl River Delta region in particular. A stable exchange rate can help service providers, such as banks, trading houses and logistics companies, to establish longer-term relationships with their overseas customers.

Since the bursting of the economic bubble in 1997, there has been much talk about breaking the link to shift the burden of the economic adjustment to the currency rather than asset values. It is argued that currency depreciation could expedite the adjustment process enabling Hong Kong to regain the economic equilibrium necessary for recovery.

Although the process seems to have worked in South Korea and Thailand, it may not have worked in Hong Kong largely because, unlike those two countries, Hong Kong is not a manufacturing economy. Currency depreciation is simply not a viable option for a service-based economy.

The government is taking action to bring the ballooning deficit under control. Perhaps more drastic measures will be needed to achieve the government's target of balancing the budget by fiscal 2007. We are sure that the government is considering all such measures and its efforts in reducing the deficit will be sustained.

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