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The 40th anniversary this week of the Hong Kong dollar peg to the US dollar has revived questions about its future, such as whether the city should peg its currency to the yuan. The old
saying, “if it isn’t broken don’t fix it” is not entirely inappropriate. Advertisement The reasons for introducing the US dollar peg in 1983 have not changed. At the time the city faced a
financial crisis amid anxiety about its future after the handover in 1997. The local currency needed – and still needs – an anchor, and the US dollar remains the most suitable, being the
most commonly used and liquid. The biggest argument against the yuan remains that it is not convertible on the capital account. The currency peg represents a trade-off between several
things. Then, as now, the stability of the exchange rate was paramount to a small and open economy, with heavy international trade and financial exposure. So the government at the time
decided to peg to the US dollar, which meant giving up autonomy in monetary policy. Advertisement The peg has since underpinned a stable exchange rate that has shielded the local economy
from shocks such as financial crises and survived attempts by speculators to break it.
