Bloomberg News

Hong Kong to Manage Yuan Inflation Risk While Holding Dollar Peg

April 19, 2013

Hong Kong Monetary Authority can manage inflation risks caused by an appreciating yuan and is committed to its currency’s dollar peg in place since 1983, Chief Executive Norman Chan said.

The yuan’s appreciation against the dollar will make food and other goods slightly more expensive, which is “manageable,” Chan said at a conference in Washington during meetings of the International Monetary Fund. “Having a fixed exchange-rate system, we are committed to make the nominal exchange rate unchanged through the issuance of bank note system and foreign-exchange intervention.”

The Chinese yuan had the biggest weekly gain in six months versus the U.S. dollar and yuan forwards rose to a record, after People’s Bank of China Deputy Governor Yi Gang said April 17 the currency’s trading band will widen “in the near future,” spurring speculation the yuan will rise further. Hong Kong banks’ borrowing costs are tied to the U.S. because of its currency peg, while the city’s economic growth is linked to China.

A stronger yuan also means Hong Kong’s services and goods will become cheaper to mainland consumers, helping the city attract tourists from mainland China and sell services there, said Chan, the city’s de facto central bank chief.

“We don’t have our own independent monetary policy, so the interest rates in Hong Kong are determined by the inflow and outflow of money into Hong Kong dollars, and all the other variables have to adjust around this anchor,” Chan said.

“We are meeting those challenges reasonably well,” he added.

Inflation Pickup

Consumer prices in Hong Kong rose 4.4 percent in February from a year earlier, the fastest pace since April 2012.

The HKMA will weigh if more measures are needed to curb property price gains in the city, according to Chan. The monetary authority told banks to maintain the risk weighting for new home loans at a minimum of 15 percent, and the city’s government doubled the stamp duty in February on all property transactions higher than HK$2 million ($257,000).

“We actually will respond and react to the development of the market,” he said. “Our measures are counter-cyclical and it depends on how the market cycle is evolving.”

Hong Kong home prices fell 1.4 percent in the week ended April 14, the fourth-straight weekly decline, according to an index compiled by Centaline Property Agency Ltd., the city’s biggest closely held realtor. It was the biggest drop since May 2010, the company said in an e-mailed statement today.

To contact the reporter on this story: Belinda Cao in New York at lcao4@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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