For an hour on Wednesday, as Hong Kong's leader struggled to deliver the most important policy address of the year amid heckling by opposition lawmakers in the city's legislature, the Hong Kong dollar swung between a 0.03 per cent gain and a 0.01 per cent loss.
But for the mild movement, Hong Kong's currency is marking the 36th anniversary of its peg to the US dollar with little fanfare. It was on October 17, 1983, the then financial secretary John Bremridge announced that the Hong Kong dollar would be pegged at a rate of HK$7.80 to US$1, which was introduced after a sharp fall in the currency's exchange rate to HK$9.50 earlier that month from about HK$6.
The plunge was triggered by a crisis of confidence among investors as the British and Chinese governments began to discuss the 1997 handover of Hong Kong. Thirty-six years on, the peg has provided a stable exchange rate environment for the city to develop into an international financial centre, although it also means the city has to follow the US interest rate moves and cannot use monetary policy to control inflation or property prices.
The peg has allowed Hong Kong to have a stable exchange rate, which has held steady in the face of daunting crises, including the stock market crash in 1987, Asian financial crisis in 1998, the Severe acute respiratory syndrome (Sars) outbreak in 2003 and the global financial crisis in 2008.
More recently, the peg has not once in the past four months weakened to the lower end of its trading band against the US dollar even as the city's economy has been buffeted by its worst political crisis ever.
The Hong Kong Monetary Authority, the city's de facto central bank, has a tight self-correcting mechanism to keep the currency trading in the 7.75 to 7.85 range. If the currency touches either end, the HKMA will use its HK$4.16 trillion (US$530.25 billion) reserves to defend the peg and keep the currency within the trading band.
"The peg has made the Hong Kong dollar very boring from a forex trader's point of view … the 1 per cent band is too narrow to make any big money from trading the Hong Kong dollar," said Jasper Lo, a veteran forex trader.
"In my 32 years of experience of trading foreign currencies in many banks and financial firms, most traders do not pay much attention to the Hong Kong dollar, while we all focus on trading the pound, yen, euro or other Asian currencies as they have wider fluctuations."
However, that has not prevented short sellers from attacking the peg. The first such attempt was in 1998 during the Asian financial crisis but they failed after the government spent HK$118 billion to intervene in the stock and futures markets.
Even during the current crisis some short sellers tried to talk down the currency, but with no success as the peg proved solid.
Eddie Yue Wai-man, the new HKMA chief executive, said defending the peg was his first priority.
"We see no need and have no intention of changing the peg, which is a well-established system," Yue said on his first day in office on October 2. "Going forward, we will continue to closely monitor market developments to ensure currency stability and the orderly operation of the money market under the system."
Analysts and businessmen have credited the peg as one of the main reasons for Hong Kong becoming a major international financial centre. The peg's solidity is also reflected in other areas, notably its stock exchange, which has ranked as the world's No 1 IPO market six times in the past 10 years.
"The peg has served Hong Kong well, which boosts confidence of investors to invest or settle trade in Hong Kong dollars with no need to worry about exchange rate risks," said Raymond Yeung, chief economist for Greater China at ANZ.
Allan Zeman, founder of Lan Kwai Fong Group and its namesake nightlife district, who came to Hong Kong in 1970, said the Hong Kong dollar was mostly steady in that decade, moving 1 to 2 per cent on average. "But in October 1983, it (Hong Kong dollar) fell by 50 to 60 per cent in a short period, making it impossible for manufacturers or businesspeople to do business," he recalled.
Zeman's fashion export business Colby continued to thrive after the peg was introduced, which he sold to local supply chain giant Li & Fung in 2000.
"(Credit to) the government for introducing the peg and maintaining a stable currency for the past 36 years."
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