By Alexandra Harney in Hong Kong and Steve Johnson in London
Published: May 18 2005 18:09 | Last updated: May 18 2005 18:09
Hong Kong on Wednesday surprised financial markets by introducing a ceiling on its currency in an effort to discourage speculative investment into the territory.
The Hong Kong dollar, which has been pegged at HK$7.8 to the US dollar since 1983, will not be allowed to strengthen beyond HK$7.75 with immediate effect. It will also not be able to weaken below HK$7.85, a shift which will be achieved over the next five weeks.
Speculative flows into Hong Kong have risen sharply since late 2003 amid growing expectation that China, whose currency is pegged to the US dollar at Rmb8.28, would revalue. Investors who see the Hong Kong dollar as a proxy for the Chinese currency were expecting it to rise if the renminbi appreciated.
Joseph Yam, HKMA chief executive, said the move was aimed at sending a clear message to investors about how much Hong Kong's currency would be allowed to strengthen.
"You don't need to make use of the Hong Kong dollar as a speculative tool for betting" on appreciation of the renminbi, he said yesterday.
Until now, the Hong Kong Monetary Authority has intervened if the currency has fallen below HK$7.8 to the US dollar - known as a fixed convertibility "floor" - but has not set a "ceiling" above which it cannot rise.
Some analysts welcomed the move. "Hong Kong is simply tidying up its currency regime to deal with a scenario - strong speculation about an appreciation - that had not previously been a problem," Julian Jessop, chief international economist at Capital Economics in London, said.
But Derek Halpenny, senior currency economist at Bank of Tokyo-Mitsubishi, argued Hong Kong's decision could herald increased speculation as the market tests the limits of the new trading band.
"The credibility of the old fixing had been undermined, the market will now test the credibility of the new band," he said.
Jonathan Anderson, chief economist for Asia at UBS, also questioned whether speculators would be discouraged.
"We were expecting a move that was going to stem the problems. It's not clear that this really does that," he said.
Mr Yam denied the decision was related to China's plans for currency reform.
"I have no inside information on what the People's Bank of China [China's central bank] may or may not do," he said.
Mr Halpenny argued that the move suggested that Hong Kong does not believe China will revalue the renminbi soon, and thus felt compelled to take action itself.
Enoch Fung of Goldman Sachs said the move would lead to a faster than expected rise in Hong Kong interest rates.
The Hong Kong dollar initially fell on Wednesday to 7.809 to the dollar, before rallying to 7.795. The Japanese yen rose to Y107.11 against the dollar and Y135.39 against the euro in early New York trading amid speculation that Hong Kong's move may be a sign that China is set to follow suit.
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