2013 年 09 月 10 日
To investigate this question, a very important concept has to be introduced: Money is a tradable good, of which the value may fluctuate . In other words, the value of the money in your pocket is changing daily because of external or internal factors.
Hong Kong government has set a linked exchange rate against the US Dollar. The dollar peg stabilizes the Hong Kong currency at the expense of monetary policy independence, leaving Hong Kong vulnerable to inflation, particularly in the face of Fed’s three rounds of quantitative easing.
The zero interest rate in US is aimed at stimulating the US economy under the negative circumstances. However, under the linked exchange rate system, Hong Kong’s interest rates generally cannot deviate from those of the US too much. Although Hong Kong has a slightly higher benchmark interest rate (0.5%) compared with the US (0.25%), the rate is still low compared with those of other places like Mainland China (6%) and Australia (2.5%) (as at August 2013)[i]. The US low interest rate strategy to revive the economy does not suit Hong Kong. The lower interest rates attract foreign investors to borrow Hong Kong dollars and invest in areas like property. Quantitative easing, combined with Hong Kong’s lack of monetary independence, contributes to increasing inflationary pressure in Hong Kong.
The inflation erodes Hong Kong people’s hard-earned revenue, especially when Fed’s quantitative easing has caused massive capital inflow to Hong Kong, creating bubbles in share and property markets.
Normally, a high demand for a currency will drive up the currency rate and reduce inflationary pressure. However, the Hong Kong dollar is only allowed to fluctuate between 7.75-7.85. The Hong Kong Monetary Authority has to hold down the value of the Hong Kong dollar by buying US dollars and selling Hong Kong dollars. The purchasing power of the Hong Kong dollar is kept low and people suffer as a result.
However, the linked exchange rate system is a safeguard for our economy. It guarantees the value of our currency with the backing of the US dollar, which is the most traded currency on earth. The cost that HK people paying for the system can be justified by the merits it has brought. It is not an exaggeration to say that the entire Hong Kong economy is buttressed by the system.
The depreciating Hong Kong dollar and the bubble economy raise the price level and lower Hong Kong people’s living standard. Meanwhile, the gradually appreciating RMB lifts the prices of basic commodities in Hong Kong, as most of them are imported from Mainland China. As a consequence, Hong Kong people are living with diminishing purchasing power under the influence of the two economic giants.
A considerable amount of capital from Mainland China flows into Hong Kong and seeks profitable investments in areas like real property. These investments crowd out local buyers. For example, real property has been considered the most profitable investment. Even today, it still remains true. The problem is that an average Hong Kong citizen can no longer earn sufficient money from their job to buy an apartment. The home prices reach sky-high levels and break records every year. Hong Kong people’s savings are eroded but they cannot do much about it.
The Hong Kong government has introduced some measures with a view to cooling down the property market. Albeit well-intended, these are merely quick fixes. Some long-term measures should be formulated to maintain people’s purchasing power. For example, is it possible to expand and reform iBond？ These bonds cannot be re-sold in the public market but can be re-sold back to the government. The interest rates should be slightly higher the inflation rate. The funds raised through the bonds can be invested in high-potential companies or industries.
Although this proposal seems to run counter to the free-market doctrines, we must note that even the US, the champion of free-market capitalism, has introduced quantitative easing, which is in essence a subsidy for banks and financial institutions.
Hong Kong people cannot stick to the non-intervention dogma without suffering the consequences. The rest of the world is changing the rules. We cannot afford to be sitting ducks and we have to come up with innovative solutions in the ever-changing world.
Written by Alex Cheung, 2013 summer intern
[i] Trading Economics. “United States interest rate” (http://www.tradingeconomics.com/united-states/interest-rate); “Hong Kong interest rate” (http://www.tradingeconomics.com/hong-kong/interest-rate); “Australia interest rate” (http://www.tradingeconomics.com/australia/interest-rate); “China Interest Rate” (http://www.tradingeconomics.com/china/interest-rate)