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Hong Kong stands firm behind US dollar peg on 30th anniversary

Sha Ying | CNBC

Hong Kong has no intention of abandoning its U.S. dollar peg, the government said, arguing that the system remained the most appropriate way to ensure financial stability in the Chinese territory.

John Tsang, Hong Kong's financial secretary, said in a statement on the 30th anniversary of the peg, that the government "sees no need and has no intention to change" the Linked Exchange Rates System that fixes the local currency at a rate of 7.8 to the U.S. greenback.

(Read more: China's yuan flexes muscle as US crisis rattles on)

"The LERS has successfully maintained exchange rate stability in the past three decades and has provided a stable monetary and financial environment that is crucial to the trade-dependent Hong Kong economy," Mr Tsang said on Thursday in the Chinese territory. "The stable exchange rate has also provided an important platform for our development as a financial center."

Hong Kong introduced the currency board system in 1983, amid plummeting confidence in the economy as China and the UK negotiated the future of what was then a British colony. The peg has since helped the territory become a major financial center and trade hub.

Mr Tsang said the peg had also helped Hong Kong weather the currency market turmoil that has hit some countries since the U.S. Federal Reserve started talking about "tapering" its quantitative easing. "Some economies had no choice but to impose capital controls to defend against the volatile fund flows. The Hong Kong dollar, on the contrary, has been stable," he said.

When U.S. Federal Reserve chairman Ben Bernanke raised the prospect in May that the central bank would start reducing its asset purchases, global emerging markets were hit with a wave of selling. India and Indonesia – two countries that run persistent current account deficits and rely on foreign capital for funding – were the worst hit in Asia. Both were forced to introduce measures, including interest rate increases and capital controls, to stem a run on their currencies.

But almost all emerging Asian countries suffered from capital outflows, dramatic equity market falls and significant drops in their exchange rates. Only China, with its strict currency controls, proved immune. Over the course of this year, the renminbi has continued to rise steadily against the U.S. dollar, and hit a fresh 20-year high on Wednesday.

(Read more: Here's one currency that has averted the EM rout)

After suffering the worst fall of any major currency relative to the U.S. dollar, Indonesia has tried to bolster the rupiah by implementing measures to improve currency market liquidity and signing bilateral currency swap arrangements with China, Japan and South Korea. Jakarta also abandoned its policy of using "moral suasion" to control the rate at which banks were selling rupiah – a measure that caused the foreign exchange market to seize up.

Mr Tsang said the Chinese territory's government believed that the currency board was "still the most appropriate monetary system for Hong Kong in light of the challenges ahead", which he said included the fact that the "exit from quantitative easing in major economies may result in volatile fund flows".

More from the Financial Times:

Questions on internationalizing renminbi
HK regulator joins global forex probe
China hints at discontent over lending rise

Joseph Yam, the former head of the Hong Kong Monetary Authority, the territory's central bank, surprised market participants last year by calling on the government to consider replacing the peg with a flexible exchange rate system. Writing that "nothing is absolute or sacrosanct", Mr Yam said the HKMA's insistence on keeping the peg was an "obsession or even paranoid". He added that if Hong Kong kept the peg, it should consider switching its anchor currency to the renminbi.

Norman Chan, the current HKMA head, said this week that Hong Kong should continue to peg its currency to the U.S. dollar to "minimize the risk of a recurrence of the 1983 crisis". Between May and September that year, the Hong Kong currency fell sharply from 6.5 dollars against the greenback to 9.6 dollars.

(Read more: Markets trust Washington, but for how long?)

"The preconditions for a peg to the renminbi still do not exist. One important precondition is that the 'anchor' currency must be totally and freely convertible," Mr Chan wrote this week. "It is too early to consider the use of the renminbi as our anchor currency while it is not yet freely convertible and the capital account of the mainland is still not fully liberalized."

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